[Federal Register Volume 82, Number 137 (Wednesday, July 19, 2017)]
[Rules and Regulations]
[Pages 33210-33434]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-14225]



[[Page 33209]]

Vol. 82

Wednesday,

No. 137

July 19, 2017

Part II





 Bureau of Consumer Financial Protection





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 12 CFR Part 1040





 Arbitration Agreements; Final Rule

  Federal Register / Vol. 82 , No. 137 / Wednesday, July 19, 2017 / 
Rules and Regulations  

[[Page 33210]]


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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: Final rule; official interpretations.

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SUMMARY: Pursuant to section 1028(b) of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act, the Bureau of Consumer Financial 
Protection (Bureau) is issuing this final rule to regulate arbitration 
agreements in contracts for specified consumer financial product and 
services. First, the final rule prohibits 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 concerning the covered consumer financial product or service. 
Second, the final rule requires covered providers that are involved in 
an arbitration pursuant to a pre-dispute arbitration agreement to 
submit specified arbitral records to the Bureau and also to submit 
specified court records. The Bureau is also adopting official 
interpretations to the regulation.

DATES: Effective date: This regulation is effective September 18, 2017.
    Compliance date: Mandatory compliance for pre-dispute arbitration 
agreements entered into on or after March 19, 2018.

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

SUPPLEMENTARY INFORMATION: 

I. Summary of the Final Rule

    On May 24, 2016, the Bureau of Consumer Financial Protection 
published a proposal to establish 12 CFR part 1040 to address certain 
aspects of consumer finance dispute resolution.\1\ Following a public 
comment period and review of comments received, the Bureau is now 
issuing a final rule governing agreements that provide for the 
arbitration of any future disputes between consumers and providers of 
certain consumer financial products and services.
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    \1\ Arbitration Agreements, 81 FR 32830 (May 24, 2016).
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    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).\2\ In 2015, the Bureau published 
and delivered to Congress a study of arbitration (Study).\3\ In the 
Dodd-Frank Act, Congress also authorized the Bureau, after completing 
the 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.\4\ Congress 
also required that the findings in any such rule be consistent with the 
Bureau's Study.\5\ In accordance with this authority, the final rule 
issued today imposes two sets of limitations on the use of pre-dispute 
arbitration agreements by covered providers of consumer financial 
products and services. First, the final rule prohibits providers from 
using a pre-dispute arbitration agreement to block consumer class 
actions in court and requires most providers to insert language into 
their arbitration agreements reflecting this limitation. This final 
rule is based on the Bureau's 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.
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    \2\ Public Law 111-203, 124 Stat. 1376 (2010), section 1028(a).
    \3\ 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 
final rule where relevant, and the entire Study will be included in 
the docket for this rulemaking at www.regulations.gov.
    \4\ Dodd-Frank section 1028(b).
    \5\ Id.
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    Second, the final rule requires providers that use pre-dispute 
arbitration agreements to submit certain records relating to arbitral 
and court proceedings to the Bureau. The Bureau will use the 
information it collects to continue monitoring arbitral and court 
proceedings to determine whether there are developments that raise 
consumer protection concerns that may warrant further Bureau action. 
The Bureau is also finalizing provisions that will require it to 
publish the materials it collects on its Web site with appropriate 
redactions as warranted, to provide greater transparency into the 
arbitration of consumer disputes.
    The final rule applies 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, 
subject to certain exclusions specified in the rule, providers that are 
engaged in:
     Extending consumer credit, participating in consumer 
credit decisions, or referring or selecting creditors for non-
incidental consumer credit, each when done by a creditor under 
Regulation B implementing the Equal Credit Opportunity Act (ECOA), 
acquiring or selling consumer credit, and servicing an extension of 
consumer credit;
     extending or brokering automobile leases as defined in 
Bureau regulation;
     providing services to assist with debt management or debt 
settlement, to modify the terms of any extension of consumer credit, or 
to avoid foreclosure, and providing products or services represented to 
remove derogatory information from, or to improve, a person's credit 
history, credit record, or credit rating;
     providing directly to a consumer a consumer report as 
defined in the Fair Credit Reporting Act (FCRA), a credit score, or 
other information specific to a consumer derived from a consumer file, 
except for certain exempted adverse action notices (such as those 
provided by employers);
     providing accounts under the Truth in Savings Act (TISA) 
and accounts and remittance transfers subject to the Electronic Fund 
Transfer Act (EFTA);
     transmitting or exchanging funds (except when necessary to 
another product or service not covered by this rule offered or provided 
by the person transmitting or exchanging funds), 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 (FDCPA).
    Consistent with the Dodd-Frank Act, the final rule applies only to 
agreements entered into after the end of the 180-day period beginning 
on the regulation's

[[Page 33211]]

effective date.\6\ The Bureau is adopting an effective date of 60 days 
after the final rule is published in the Federal Register. To 
facilitate implementation and ensure compliance, the final rule 
requires providers in most cases to insert specified language into 
their arbitration agreements to explain the effect of the rule. The 
final rule also permits 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 final rule's requirement not to use an arbitration agreement to 
block a class action.
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    \6\ 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.\7\ 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 
final rule generally refers to as ``arbitration agreements''Sec.  \8\--
have a long history, primarily in commercial contracts, where companies 
historically had bargained to create agreements tailored to their 
needs.\9\ 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.\10\
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    \7\ ``Arbitration,'' Black's Law Dictionary (10th ed. 2014).
    \8\ Section 1040.2(d) defines the phrase ``pre-dispute 
arbitration agreement.'' When referring to the definition, in Sec.  
1040.2(d), this final rule uses the full term or otherwise clarifies 
the intended usage.
    \9\ See infra Part II.C.
    \10\ 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. As 
is underscored by the range of comments received on the proposal, 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 
and limit the filing or resolution of certain claims in court or in 
arbitration.
    In recent years, 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,\11\ 
authorized the Securities and Exchange Commission (SEC) to regulate 
arbitration agreements in contracts between consumers and securities 
broker-dealers and investment advisers,\12\ and prohibited the use of 
arbitration agreements in connection with certain whistleblower 
proceedings.\13\
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    \11\ Dodd-Frank section 1414(e) (codified as 15 U.S.C. 
1639c(e)).
    \12\ Dodd-Frank sections 921(a) and 921(b) (codified as 15 
U.S.C. 78o(o) and 15 U.S.C. 80b-5(f)).
    \13\ 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.\14\ Congress also required that the 
findings in any such rule be consistent with the study.\15\ The Bureau 
solicited input on the appropriate scope, methods, and data sources for 
the study in 2012\16\ and released results of its three-year Study in 
March 2015.\17\ Part III of this final 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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    \14\ Dodd-Frank section 1028(b).
    \15\ Id.
    \16\ 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).
    \17\ Study, supra note 3. 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 typically 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 and, depending on 
the contract and the product or service, a service provider to the 
underlying provider.
Early Consumer Protection in the Law
    Prior to the twentieth century, the law generally embraced the 
notion of caveat emptor, or ``buyer beware'' in consumer affairs.\18\ 
State 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.\19\ 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.\20\ 
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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    \18\ 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 Application of Consumer Protection Law: Judicial 
Activism or Legislative Directive,'' 32 Santa Clara L. Rev. 347, at 
351-55 (1992).
    \19\ Wheeler-Lea Act of 1938, Public Law 75-447, 52 Stat. 111 
(1938).
    \20\ 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

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Protection Act (CCPA) in 1968.\21\ The CCPA included the Truth in 
Lending Act (TILA), which imposed disclosure and other requirements on 
creditors.\22\ 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.\23\
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    \21\ Public Law 90-321, 82 Stat. 146 (1968).
    \22\ Id. at title I.
    \23\ 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 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.\24\ In 1974, Congress passed the ECOA to prohibit 
creditors from discriminating against applicants with respect to credit 
transactions.\25\ In 1977, Congress passed the FDCPA to promote the 
fair treatment of consumers who are subject to debt collection 
activities.\26\
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    \24\ Public Law 91-508, 84 Stat. 1114-2 (1970).
    \25\ Congress amended that law in 1976. Public Law 94-239, 90 
Stat. 251 (1976).
    \26\ 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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    In the 1960s, States began passing their own consumer protection 
statutes modeled on the FTC Act to prohibit unfair and deceptive 
practices. Unlike the FTC Act, however, these State statutes typically 
provide for private enforcement.\27\ 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.\28\ Currently, 49 of the 50 
States and the District of Columbia have State consumer protection 
statutes modeled on the FTC Act that allow for private rights of 
action.\29\
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    \27\ Victor E. Schwartz & Cary Silverman, ``Common Sense 
Construction of Consumer Protection Acts,'' 54 U. Kan. L. Rev. 1, at 
15-16 (2005).
    \28\ Id.
    \29\ Id. at 16. Every State prohibits deception; some prohibit 
unfair practices as well. See Carolyn L. Carter, ``Consumer 
Protection in the States,'' Nat'l Consumer L. Ctr., at 5 (2009), 
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 the wave of 
consumer financial protection statutes described above, 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 an individual to group 
his or her claims together with those of other, absent individuals in 
one lawsuit under certain circumstances and to obtain monetary or 
injunctive relief for the group. 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 class 
actions.\30\
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    \30\ See, e.g., Wilcox v. Commerce Bank of Kansas City, 474 F.2d 
336, 343-44 (10th Cir. 1973).
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    Indeed, Congress affirmatively calibrated enforcement through 
private class actions in several of the consumer protection statutes by 
specifically referring to class actions and adopting statutory damage 
schemes that are capped by a percentage of the defendants' net 
worth.\31\ For example, when consumers initially sought to bring TILA 
class actions, a number of courts applying Federal Rule 23 denied 
motions to certify a class because of the prospect of extremely large 
damages resulting from the aggregation of a large number of claims for 
statutory damages.\32\ 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.\33\ Congress has twice increased 
the cap on class action damages in TILA: To $500,000 in 1976 and 
$1,000,000 in 2010.\34\ Many other statutes similarly cap damages in 
class actions.\35\ Further, the legislative history of other statutes 
indicates a particular intent to permit class actions given the 
potential for a small recovery in many consumer finance cases for 
individual damages.\36\ Similarly, many State legislatures contemplated 
consumers' filing of class actions to vindicate violations of their 
versions of the FTC Act.\37\ A minority of States expressly prohibit 
class actions to enforce their FTC Acts.\38\
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    \31\ 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.
    \32\ See, e.g., Ratner v. Chem. Bank N.Y. Trust Co., 54 FRD. 
412, 416 (S.D.N.Y. 1972).
    \33\ See Public Law 93-495, 88 Stat. 1518, section 408(a).
    \34\ Truth in Lending Act Amendments, Public Law 94-240, 90 
Stat. 260 (1976); Dodd-Frank section 1416(a)(2).
    \35\ 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).
    \36\ 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.''
    \37\ The UDAP laws of at least 14 States expressly permit class 
action lawsuits. See, e.g., Cal. Bus. & Prof. 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 secs. 13-11-19 and 20 (2015); Wyo. Stat. sec. 40-12-108(b) 
(2015).
    \38\ 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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[[Page 33213]]

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.\39\ 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.\40\ 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.\41\
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    \39\ Ortiz v. Fibreboard Corp., 527 U.S. 815, 832-33 (1999).
    \40\ 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, at 704 (2013) (citing Stephen C. Yeazell, From 
Medieval Group Litigation to the Modern Class Action 40 (1987)).
    \41\ 7A Charles Alan Wright & Arthur R. Miller, ``Federal 
Practice and Procedure: Civil Sec.  1751'' (3d ed. 2002).
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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.\42\ 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 Federal Rule 23 established a 
procedure for class actions.\43\ That procedure's ability to bind 
absent class members was never clear, however.\44\
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    \42\ 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.
    \43\ See Fed. R. Civ. P. 23 (1938).
    \44\ 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 Federal Rule 23 was amended to create 
the class action mechanism that largely persists in the same form to 
this day.\45\ Federal 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.\46\ The 1966 revisions to 
Federal 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.'' \47\ 
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.'' \48\ Class actions 
have been brought not only by individuals, but also by companies, 
including financial institutions.\49\
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    \45\ See, e.g., Robert H. Klonoff, ``The Decline of Class 
Actions,'' 90 Wash. U. L. Rev. 729, at 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''). In 1966, a member of the Advisory Committee 
explained that the class action device was designed to bind all 
absent class members because ``Requiring . . . individuals 
affirmatively to request inclusion in the lawsuit would result in 
freezing out the claims of people--especially small claims held by 
small people--who for one reason or another, ignorance, timidity, 
unfamiliarity with business or legal matters, will simply not take 
the affirmative step. The moral justification for treating such 
people as null quantities is questionable. For them the class action 
serves something like the function of an administrative proceeding 
where scattered individual interests are represented by the 
Government.'' Benjamin Kaplan, ``Continuing the Work of the Civil 
Committee: 1966 Amendments of the Federal Rules of Civil Procedure 
(i),'' 81 Harv. L. Rev. 356, at 397-98 (1967).
    \46\ 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.'').
    \47\ Califano v. Yamasaki, 442 U.S. 682, 701 (1979).
    \48\ 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 Federal 
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.'').
    \49\ See, e.g., Class Action Complaint, Bellwether Community 
Credit Union v. Chipotle Mexican Grill Inc., No.17-01102 (D.Colo. 
May 4, 2017), ECF No. 1 (asserting class action claims on behalf of 
financial institutions against Chipotle for data breach that exposed 
customers' names and debit and credit card numbers to hackers); 
Consumer Plaintiffs' Consolidated Class Action Complaint at 1, 5, In 
re: The Home Depot, Inc. Customer Data Breach Litig., No. 14-02583 
(N.D. Ga. May 27, 2015), ECF No. 93 (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''); Memorandum and 
Order at 2, 14, In re: Target Corp. Customer Data Security Breach 
Litig., No. 14-2522 (D. Minn. Sept. 15, 2015), ECF 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 Federal Rule 23
    A class action can be filed and maintained under Federal Rule 23 in 
any case where there is a private right to bring a civil action in 
Federal court, unless otherwise prohibited by law.\50\ Pursuant to 
Federal 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.\51\ 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 Federal 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 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.
---------------------------------------------------------------------------

    \50\ As one commenter noted, it is a procedural right not a 
substantive one.
    \51\ Fed. R. Civ. P. 23(a)(1) through (4).
---------------------------------------------------------------------------

    These and other requirements of Federal Rule 23 are designed to 
ensure

[[Page 33214]]

that class action lawsuits safeguard absent class members' due process 
rights because they may be bound by what happens in the case.\52\ 
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.\53\ 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.\54\ 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 Federal Rule 23, including the requirements 
of Federal 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.\55\ If not certified, the case proceeds only to 
bind the named plaintiff.
---------------------------------------------------------------------------

    \52\ See, e.g., Amchem Prod., Inc., 521 U.S. at 619-21.
    \53\ See Fed. R. Civ. P. 23(e).
    \54\ Federal Rule 23 also permits a class of defendants.
    \55\ 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 Federal 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.\56\ Among its tasks, a 
court must review any attempts to settle or voluntarily dismiss the 
case on behalf of the class,\57\ may reject any settlement agreement if 
it is not ``fair, reasonable and adequate,''T \58\ and must ensure that 
the payment of attorney's fees is ``reasonable.'' \59\ 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.
---------------------------------------------------------------------------

    \56\ Fed. R. Civ. P. 23(g).
    \57\ 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.
    \58\ Fed. R. Civ. P. 23(e)(2).
    \59\ Fed. R. Civ. P. 23(h).
---------------------------------------------------------------------------

    In addition to proceedings in Federal court, every State except 
Virginia and Mississippi has established procedures permitting 
individuals to file a class action; almost all of these States have 
adopted class action procedures analogous to Federal Rule 23.\60\
---------------------------------------------------------------------------

    \60\ See Marcy Hogan Greer, ``A Practitioner's Guide to Class 
Actions'' at 142 (A.B.A. 2010). One State, Utah, authorizes 
providers of closed-end consumer credit to include in the credit 
contract a provision that would waive the consumer's right to 
participate in a class action. Utah Code 70C-3-14; ``Mississippi 
does not permit class actions of any kind. When Mississippi adopted 
civil rules modeled on the Federal Rules of Civil Procedure, it 
expressly omitted Rule 23.'' (footnote omitted). Id. at 1013.
---------------------------------------------------------------------------

Developments in Class Action Procedure Over Time
    Since the 1966 amendments, Federal Rule 23 has generated a 
significant body of case law as well as significant controversy.\61\ In 
response, Congress and the Advisory Committee on the Federal Rules of 
Civil Procedure (which has been delegated the authority to change 
Federal Rule 23 under the Rules Enabling Act) have made a series of 
targeted changes to Federal Rule 23 to calibrate the equities of class 
plaintiffs and defendants. Meanwhile, the courts have also addressed 
concerns about Federal Rule 23 in the course of interpreting the rule 
and determining its application in the context of particular types of 
cases.
---------------------------------------------------------------------------

    \61\ 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, at 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.\62\ 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.\63\ Among other things, CAFA expanded the subject matter 
jurisdiction of Federal courts to allow them to adjudicate most large 
class actions.\64\ The Advisory Committee also periodically reviews and 
updates Federal Rule 23. In 1998, the Advisory Committee amended 
Federal 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.\65\ 
In 2003, the Advisory Committee amended Federal 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.\66\ In 2015, the 
Advisory Committee further identified several issues that ``warrant 
serious examination'' and presented ``conceptual sketches'' of possible 
further amendments.\67\
---------------------------------------------------------------------------

    \62\ Private Securities Litigation Reform Act of 1995, Public 
Law 104-67, 109 Stat. 737 (1995).
    \63\ Class Action Fairness Act of 2005, Public Law 109-2, 119 
Stat. 4 (2005).
    \64\ 28 U.S.C. 1332(d), 1453, and 1711-15.
    \65\ Fed. R. Civ. P. 23(f). See also Herbert B. Newberg, et al., 
``Newberg on Class Actions,'' at Sec.  7:41 (5th ed. Thomson Reuters 
2016); 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).
    \66\ 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).'').
    \67\ See, e.g., Rule 23 Subcomm. Rept., Advisory Committee on 
Rules of Civil Procedure, at 243-97 (2015), 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 Federal 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 Federal Rule 23(a)(2), holding that in the 
absence of a common question among putative class members class 
certification is not appropriate.\68\ In Comcast Corp. v. Behrend, the 
Court held that district courts must undertake a ``rigorous analysis'' 
of whether the damages model supporting a plaintiff's case is 
consistent with its theory of liability for purposes of satisfying the 
predominance requirements in Federal Rule 23(b)(3) and that that in the 
absence of such a model of individual damages may foreclose class 
certification.\69\ In Campbell-Ewald Co. v. Gomez, the Court held that 
a defendant

[[Page 33215]]

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.\70\ 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 classwide liability where each class member could have 
relied on that sample to establish liability had each brought an 
individual action.\71\ Finally, in Spokeo, Inc. v. Robins, a class 
action alleging a violation of Federal law, the Court reiterated that 
to have standing in Federal court a plaintiff must allege an injury in 
fact--specifically, ```an invasion of a legally protected interest' 
that is `concrete and particularized' and `actual or imminent, not 
conjectural or hypothetical.''' \72\ The case was remanded to the Ninth 
Circuit to determine whether the plaintiff had alleged an actual injury 
under the FCRA.\73\
---------------------------------------------------------------------------

    \68\ 564 U.S. 338, 131 S. Ct. 2541 (2011); see also Klonoff, 
supra note 45, at 775.
    \69\ 133 S. Ct. 1426 (2013).
    \70\ Campbell-Ewald Co. v. Gomez, 136 S. Ct. 663, 670 (2016).
    \71\ Tyson Foods, Inc. v. Bouaphakeo, 136 S. Ct. 1036, 1046-48 
(2016).
    \72\ Spokeo, Inc. v. Robins, 135 S. Ct. 1892 (2015).
    \73\ Id. Following remand, the Spokeo case remains pending in 
the Ninth Circuit. See Robins v. Spokeo Inc., No. 11-56843 (9th 
Cir).
---------------------------------------------------------------------------

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.\74\ 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.\75\ Second, with some exceptions, either side can use the 
arbitration agreement to require that a dispute that has been filed in 
court instead proceed in arbitration.\76\ The typical agreement also 
specifies an organization called an arbitration administrator. 
Administrators, which may be for-profit or nonprofit 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.\77\ Parties usually have very 
limited rights to appeal from a decision in arbitration to a court.\78\ 
Most arbitration also provides for limited or streamlined discovery 
procedures as compared to those in many court proceedings.\79\
---------------------------------------------------------------------------

    \74\ See ``Arbitration,'' supra note 7.
    \75\ Id.
    \76\ 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 3, 
section 2 at 33-34.
    \77\ See id. section 2 at 34-40.
    \78\ 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, infra note 150, at 6 n.4.
    \79\ See Study, supra note 3, section 4 at 16-17.
---------------------------------------------------------------------------

History of Arbitration
    The use of arbitration to resolve disputes between parties is not 
new.\80\ In England, the historical roots of arbitration date to the 
medieval period, when merchants adopted specialized rules to resolve 
disputes between them.\81\ English merchants began utilizing 
arbitration in large numbers during the nineteenth century.\82\ 
However, English courts were hostile towards arbitration, limiting its 
use through doctrines that rendered certain types of arbitration 
agreements unenforceable.\83\ 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.\84\ 
Through the early 1920s, United States courts often refused to enforce 
arbitration agreements and awards.\85\
---------------------------------------------------------------------------

    \80\ 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, at 134-36 (2002); Derek Roebuck, ``Roman 
Arbitration'' (Holo. Books 2004).
    \81\ See, e.g., Jeffrey W. Stempel, ``Pitfalls of Public Policy: 
The Case of Arbitration Agreements,'' 22 St. Mary's L. J. 259, at 
269-70 (1990).
    \82\ Id.
    \83\ See, e.g., Schmitz, supra note 80, at 137-39.
    \84\ See, e.g., Stempel, supra note 81, at 273-74.
    \85\ David S. Clancy & Matthew M.K. Stein, ``An Uninvited Guest: 
Class Arbitration and the Federal Arbitration Act's Legislative 
History,'' 63(1) Bus. L. 55, at 58 and n.11 (2007) (citing, inter 
alia, Haskell v. McClintic-Marshall Co., 289 F. 405, 409 (9th Cir. 
1923) (refusing to enforce an 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.\86\ 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.\87\ 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).\88\ 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.'' \89\
---------------------------------------------------------------------------

    \86\ 43 N.Y. Stat. 833 (1925).
    \87\ Id.
    \88\ 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. L. & Bus. 745, at 754 n.45 (2009).
    \89\ 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.\90\ 
Beginning in the 1980s, however, companies began to use arbitration 
agreements in form contracts with consumers, investors, employees, and 
franchisees that were not the result of individually negotiated 
terms.\91\ By the 1990s, this trend began to spread more broadly within 
the consumer financial services industry.\92\
---------------------------------------------------------------------------

    \90\ See, e.g., Soia Mentschikoff, ``Commercial Arbitration,'' 
61 Colum. L. Rev. 846, at 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.
    \91\ Stephen J. Ware, ``Arbitration Clauses, Jury-Waiver Clauses 
and Other Contractual Waivers of Constitutional Rights,'' 67 L. & 
Contemp. Probs. 179 (2004).
    \92\ See 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 Consumer Fin. L. Q. Rep. 365, at 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. Bus. J. 917, at 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'').

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

[[Page 33216]]

    One notable feature of these agreements is that they could be used 
to block class action litigation and often class arbitration as 
well.\93\ The 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.\94\ 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.\95\
---------------------------------------------------------------------------

    \93\ 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.'').
    \94\ 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,'' at 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,'' at 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.'').
    \95\ 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.\96\
---------------------------------------------------------------------------

    \96\ 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 athttps://www.citizen.org/our-work/access-justice/arbitration-trap.
---------------------------------------------------------------------------

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 NAF, which was the most widely used 
arbitration administrator for debt collection.\97\ 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.\98\ 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.\99\ 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.\100\ 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.\101\
---------------------------------------------------------------------------

    \97\ See Mollenkamp, supra note 96. 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., No. 1409 (S.D.N.Y. 
Dec. 13, 2011).
    \98\ California v. National Arbitration Forum, Inc., No. 473-569 
(S.F. Sup. Ct. Mar. 2009).
    \99\ See Complaint at 2, State of Minnesota v. National 
Arbitration Forum, Inc., No. 09-18550 (4th Jud. Dist. Minn. July 14, 
2009), available at https://www.nclc.org/images/pdf/unreported/naf_complaint.pdf.
    \100\ 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. Press Release, City Attorney Dennis Herrera, ``Herrera 
Secures $5 Million Settlement, Consumer Safeguards Against BofA 
Credit Card Subsidiary,'' (Aug. 22, 2011), available at https://www.sfcityattorney.org/2011/08/22/herrera-secures-5-million-settlement-consumer-safeguards-against-bofa-credit-card-subsidiary/.
    \101\ Memorandum and Order, In re National Arbitration Forum 
Trade Practices Litig., No. 10-02122 (D. Minn. Aug. 8, 2011), ECF 
120.
---------------------------------------------------------------------------

    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.\102\ Specifically, shortly 
after the NAF settlement, the AAA offered testimony to Congress that--
independent of the NAF settlement--AAA ``had independently reviewed 
areas of the process and concluded that it had some weaknesses'' in its 
own debt collection arbitration program, and noted that generally that 
``areas needing attention . . . include[d] consumer notification, 
arbitrator neutrality, pleading and evidentiary standards, respondents' 
defenses and counterclaims, and arbitrator training and recruitment.'' 
\103\
---------------------------------------------------------------------------

    \102\ See Press Release, AAA, ``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 AAA, ``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. 81 FR 
32830, 32836 n.97 (May 24, 2016).
    \103\ See Press Release, AAA, supra note 102.
---------------------------------------------------------------------------

    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,\104\ challengers argued that

[[Page 33217]]

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.\105\ 
Initially, these challenges yielded conflicting results. Some courts 
held that class arbitration waivers were not unconscionable.\106\ Other 
courts held that such waivers were unenforceable on unconscionability 
grounds.\107\ Some of these decisions also held that the FAA did not 
preempt application of a State's unconscionability doctrine.\108\
---------------------------------------------------------------------------

    \104\ 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.'').
    \105\ See, e.g., Opening Brief on the Merits at 5, Discover Bank 
v. Superior Court, No. S113725, 2003 WL 26111906, (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.'').
    \106\ 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).
    \107\ 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).
    \108\ 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 a 
particular State's 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.'' \109\ 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).\110\ 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.\111\ 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.\112\
---------------------------------------------------------------------------

    \109\ AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 344 (2011).
    \110\ Id. at 348-51.
    \111\ See Robert Buchanan Jr., ``The U.S. Supreme Court's 
Landmark Decision in AT&T Mobility v. Concepcion: One Year Later,'' 
Bloomberg Legal News, 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.
    \112\ American Express Co. v. Italian Colors Restaurant, 133 S. 
Ct. 2304, 2309 (2013).
---------------------------------------------------------------------------

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.\113\ 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.\114\ 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.\115\ In addition, since 
1976, the regulations of the Commodity Futures Trading Commission 
(CFTC) implementing the Commodity Exchange Act (CEA) have required that 
arbitration agreements in commodities contracts be voluntary.\116\ 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.\117\
---------------------------------------------------------------------------

    \113\ See FINRA, ``Arbitration and Mediation,'' https://www.finra.org/arbitration-and-mediation (last visited Feb. 8, 2017).
    \114\ FINRA, ``Class Action Claims,'' at Rule 12204(d). For 
individual disputes between brokers and customers, FINRA requires 
individual arbitration.
    \115\ See Self-Regulatory Organizations; National Ass'n of 
Securities Dealers, Inc.; Order Approving Proposed Rule Change 
Relating to the Exclusion of Class Actions from Arbitration 
Proceedings, Exchange Act Release No. 31371, 1992 WL 324491, (Oct. 
28, 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.
    \116\ Arbitration or Other Dispute Settlement Procedures, 41 FR 
42942, 42946 (Sept. 29, 1976); 17 CFR 166.5(b).
    \117\ 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.
---------------------------------------------------------------------------

    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.\118\ 
Some courts in the late 1990s disagreed with

[[Page 33218]]

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.''\119\ 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.\120\
---------------------------------------------------------------------------

    \118\ 16 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, at 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 
and 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).
    \119\ See 80 FR 42710, 42719 (July 20, 2015).
    \120\ See id.
---------------------------------------------------------------------------

    More recently, the Department of Labor finalized a rule addressing 
conflicts of interest in retirement advice.\121\ To be eligible for an 
exemption from part of that rule, a covered entity cannot employ an 
arbitration agreement that can be used to block a class action, 
although agreements mandating arbitration of individual disputes will 
continue to be permitted.\122\ Other agencies are reevaluating their 
arbitration initiatives. The Department of Education recently sought to 
postpone implementation of a rule that was intended to limit the impact 
of arbitration agreements in certain college enrollment agreements by 
addressing the use of arbitration agreements to bar students from 
bringing group claims.\123\ The Centers for Medicare and Medicaid 
Services (CMS) have proposed revisions to a rule finalized in late 2016 
regarding the requirements that long-term health care facilities must 
meet to participate in the Medicare and Medicaid programs.\124\
---------------------------------------------------------------------------

    \121\ Best Interest Contract Exemption, 81 FR 21002 (Apr. 8, 
2016).
    \122\ 81 FR 21002, 21020 (Apr. 8, 2016).
    \123\ See Student Assistance General Provisions, 82 FR 27621 
(June 16, 2017); see also Student Assistance General Provisions, 81 
FR 75926, 76021-31 (Nov. 1, 2016).
    \124\ The recent proposal seeks to amend the 2016 rule's 
required terms for the use of arbitration agreements between long-
term care facilities and residents of those facilities. 82 FR 26649 
(June 5, 2017); see also Centers for Medicare & Medicaid Services, 
Medicare and Medicaid Programs, Reform of Requirements for Long-Term 
Care Facilities, 81 FR 68688 (Oct. 4, 2016).
---------------------------------------------------------------------------

    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.\125\ 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.\126\ 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.'' \127\ 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.\128\ 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.\129\
---------------------------------------------------------------------------

    \125\ 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).
    \126\ John Warner National Defense Authorization Act for Fiscal 
Year 2007, Public Law 109-364, 120 Stat. 2083 (2006).
    \127\ Limitations on Terms of Consumer Credit Extended to 
Service Members and Dependents, 72 FR 50580 (Aug. 31, 2007) 
(codified at 32 CFR 232).
    \128\ 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 to arbitrate certain kinds of 
employment claims. See Department of Defense Appropriations Act of 
2010, Public Law 111-118, 123 Stat. 3454 (2010), section 8116.
    \129\ 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.\130\ 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.\131\ Section 922 of the Act invalidated the use of 
arbitration agreements in connection with certain whistleblower 
proceedings.\132\ 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.\133\ 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.
---------------------------------------------------------------------------

    \130\ 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).
    \131\ Dodd-Frank section 921(b).
    \132\ Dodd-Frank section 922(c)(2).
    \133\ Dodd-Frank section 1028(a).
---------------------------------------------------------------------------

    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.\134\ However, States are 
constrained in their ability to regulate arbitration because the FAA 
preempts conflicting State law.\135\
---------------------------------------------------------------------------

    \134\ Cal. Civ. Proc. Code sec. 1281.96 (amended effective Jan. 
1, 2015); DC Code sec. 16-4430; Md. Comm. L. Code, secs. 14-3901-05; 
10 M.R.S.A. sec. 1394 (Maine).
    \135\ 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.'').
---------------------------------------------------------------------------

Arbitration Today
    Today, the AAA is the primary administrator of consumer financial 
arbitrations.\136\ 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.\137\ 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

[[Page 33219]]

process.'' \138\ A second entity, JAMS, administers consumer financial 
arbitrations pursuant to the JAMS Streamlined Arbitration Rules & 
Procedures \139\ and the JAMS Consumer Minimum Standards.\140\ These 
administrators' procedures for arbitration both 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.
---------------------------------------------------------------------------

    \136\ See infra Part III.D.
    \137\ AAA, ``Consumer Arbitration Rules,'' (effective Sept. 1, 
2014), available at https://adr.org/sites/default/files/Consumer%20Rules.pdf.
    \138\ AAA, ``Consumer Due Process Protocol Statement of 
Principles,'' at Principle 1, available at http://info.adr.org/consumer-arbitration/. 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.
    \139\ JAMS, ``Streamline 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. at Rule 1(a).
    \140\ See JAMS, ``JAMS Policy on Consumer Arbitrations Pursuant 
to Pre-Dispute Clauses: Minimum Standards on Procedural Fairness,'' 
(effective July 15, 2009), available at https://www.jamsadr.com/consumer-minimum-standards/ (setting forth 10 standards). This 
policy explains that ``JAMS will administer arbitrations pursuant to 
mandatory pre-dispute arbitration clauses between companies and 
consumers1 only if the contract arbitration clause and specified 
applicable rules comply with the following minimum standards of 
fairness.'' Id.
---------------------------------------------------------------------------

    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 have 
occasionally administered them in class arbitrations involving 
providers of consumer financial products and services.\141\ 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.\142\ 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.\143\
---------------------------------------------------------------------------

    \141\ See AAA, ``Class Arbitration Case Docket,'' https://www.adr.org/casedockets (last visited Feb. 9, 2017).
    \142\ Study, supra note 3, 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.
    \143\ 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.'' Brief of the Chamber of Commerce of the United States 
of America as Amicus Curiae in Support of Plaintiff-Appellants at 9, 
Marriott Ownership Resorts, Inc. v. Sterman, No. 15-10627 (11th Cir. 
Apr. 1, 2015).
---------------------------------------------------------------------------

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).\144\
---------------------------------------------------------------------------

    \144\ Study, supra note 3.
---------------------------------------------------------------------------

    This Part describes the process the Bureau used to carry out the 
Study and summarizes the Study's results. Where relevant, this Part 
then sets forth comments received in response to the proposal that were 
specific to the Study and its results. The Bureau generally addresses 
the outcome of its Study, including analyses of the results of the 
Study, in Part VI, Findings, below. In some instances, the Bureau has 
elected to address issues related to both the Study and the Findings in 
Part VI.

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.\145\ 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.
---------------------------------------------------------------------------

    \145\ Arbitration Study RFI, supra note 16.
---------------------------------------------------------------------------

    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 incorporated an extensive analysis of 
consumer financial litigation--both individual litigation and class 
actions.\146\ 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.\147\ 
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 
included a ``difference-in-differences'' regression analysis using a 
representative random sample of the Bureau's Credit Card Database, to 
look for price impacts associated with changes relating to arbitration 
agreements for credit cards, an analysis that had never before been 
conducted.\148\
---------------------------------------------------------------------------

    \146\ See generally Study, supra note 3, sections 6 and 8.
    \147\ Id. at section 9.
    \148\ 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

[[Page 33220]]

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.\149\
---------------------------------------------------------------------------

    \149\ See Myriam Gilles, ``The End of Doctrine: Private 
Arbitration Public Law and the Anti-Lawsuit Movement,'' (Benjamin N. 
Cardozo Sch. of L. Faculty Res. Paper No. 436, 2014) (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 Results

    In December 2013, the Bureau issued a 168-page report summarizing 
its preliminary results on a number of topics (Preliminary 
Results).\150\ 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.\151\
---------------------------------------------------------------------------

    \150\ Bureau of Consumer Fin. Prot., ``Arbitration Study 
Preliminary Results,'' (Dec. 12, 2013), available at http://files.consumerfinance.gov/f/201312_cfpb_arbitration-study-preliminary-results.pdf.
    \151\ Id. at 129-131.
---------------------------------------------------------------------------

    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 advocates, 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 providers.\152\ 
Pursuant to the Paperwork Reduction Act (PRA), 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.\153\ 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.
---------------------------------------------------------------------------

    \152\ Id. at 129.
    \153\ 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.\154\ 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.\155\
---------------------------------------------------------------------------

    \154\ Study, supra note 3, section 5 at 19-68.
    \155\ 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 in Federal and selected State 
courts; 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 filings in State small claims courts 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.\156\

[[Page 33221]]

The Study also included 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, summarize the main results of 
each section, and then summarizes and addresses criticisms of the Study 
results.\157\
---------------------------------------------------------------------------

    \156\ 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.
    \157\ 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 3, 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.
---------------------------------------------------------------------------

    Before doing so, one preliminary observation is in order. With rare 
exception, the commenters did not criticize the methodologies the 
Bureau used to assemble the various data sets used in the Study or the 
analyses the Bureau conducted of these data. Rather, to the extent 
commenters addressed the Study itself--as distinguished from the 
interpretation or significance of the Study's findings--in the main the 
commenters suggested that the Bureau should have engaged in additional 
analyses.
    As explained in more detail below, in many instances the analyses 
that commenters suggested were not feasible given the limitations on 
the data available to the Bureau. For example, as discussed below, the 
Bureau did not have a feasible way of studying the actual costs that 
financial service providers incur in defending class actions or 
studying the outcomes of arbitration or individual litigation cases 
that were settled (or resolved in a manner consistent with a 
settlement) unless the case records reflected the settlement terms. In 
other instances, the analyses the commenters suggested--such as 
studying the satisfaction of the small number of consumers who file 
arbitration cases--were not, in the Bureau's judgment, relevant to 
determining whether limitations on arbitration agreements are in the 
public interest and for the protection of consumers. And, in other 
instances, resource limitations required the Bureau to deploy random 
sampling techniques or to limit the number of years under study while 
still obtaining representative data.
    Beyond that, it is worth noting that it is the case with any 
research--even research as extensive and painstaking as the Study--that 
it is always possible, ex post, to think of additional questions that 
could have been asked, additional data that could have been procured, 
or additional analyses that could have been performed. The Bureau does 
not interpret section 1028's direction to study the use of arbitration 
agreements in consumer finance to require the Bureau to research every 
conceivably relevant question or to exhaust every conceivable data 
source as a precondition to exercising the regulatory authority 
contained in that section. As discussed in substantial detail below in 
Part VI, the Bureau believes that its extensive research provides ample 
evidence that the restrictions on the use of arbitration agreements 
contained in this Rule are in the public interest and for the 
protection of consumers.
1. Prevalence and Features of Arbitration Agreements (Section 2 of 
Study)
    Section 2 of the Study addressed 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.\158\ 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.\159\ 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.
---------------------------------------------------------------------------

    \158\ Id. section 2 at 3.
    \159\ Id. section 2 at 4-6.
---------------------------------------------------------------------------

    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.\160\ 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-sized 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.
---------------------------------------------------------------------------

    \160\ 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 GPR 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.\161\ 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.\162\ 
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.\163\ For the 
mobile wireless market, the Bureau reviewed the wireless contracts of 
the eight largest facilities-based providers of mobile wireless 
services \164\ which also govern third-party billing services.\165\
---------------------------------------------------------------------------

    \161\ Study, supra note 3, section 2 at 18.
    \162\ 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.
    \163\ Id. section 2 at 24.
    \164\ 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.
    \165\ Study, supra note 3, 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.

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

[[Page 33222]]

    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.\166\ In the 
credit card market, the Study found that small bank issuers were less 
likely to include arbitration agreements than large bank issuers.\167\ 
Likewise, only 3.3 percent of credit unions in the credit card sample 
used arbitration agreements.\168\ 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.\169\ 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).\170\ In contrast, only 
7.1 percent of small-and mid-sized banks and 8.2 percent of credit 
unions used arbitration agreements.\171\ In the GPR 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.\172\ 
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.\173\
---------------------------------------------------------------------------

    \166\ Id. section 1 at 9.
    \167\ Id. section 2 at 10.
    \168\ Id.
    \169\ Id. As the Study noted, the Ross settlement--a 2009 
settlement of an antitrust case in which four of the 10 largest 
credit card issuers agreed to remove their arbitration agreements--
likely impacted 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.
    \170\ Id. section 2 at 14.
    \171\ Id.
    \172\ Id. section 2 at 19, 22.
    \173\ 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.\174\ 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.\175\ 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.\176\
---------------------------------------------------------------------------

    \174\ Id. section 2 at 30.
    \175\ Id. section 2 at 38.
    \176\ 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 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 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.\177\
---------------------------------------------------------------------------

    \177\ 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.\178\ 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.\179\
---------------------------------------------------------------------------

    \178\ Id. section 2 at 44-47.
    \179\ 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.\180\ 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.\181\
---------------------------------------------------------------------------

    \180\ Id. section 2 at 33-34.
    \181\ 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.\182\ 
Most arbitration agreements reviewed in the Study contained provisions 
that had the effect of capping consumers' upfront arbitration costs at 
or below the AAA's maximum consumer fee thresholds. These same 
arbitration agreements took noticeably different approaches to the 
reallocation

[[Page 33223]]

of arbitration fees in the arbitrator's award, with approximately one-
fifth of the arbitration agreements in credit card, checking account, 
and storefront payday loan markets permitting shifting company fees to 
consumers.\183\ The Study also found that only a small number of 
agreements representing negligible shares of the relevant markets 
directed or permitted arbitrators to award attorney's fees to 
prevailing companies.\184\ A significant share of arbitration 
agreements across almost all markets did not address attorney's 
fees.\185\
---------------------------------------------------------------------------

    \182\ 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.
    \183\ Id. section 2 at 62-66.
    \184\ Id. section 2 at 67.
    \185\ 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.
---------------------------------------------------------------------------

    Aside from costs more generally, 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 attorney's fees to the consumer.\186\ 
However, as the Study pointed out, the AAA's consumer arbitration fee 
schedule, which became effective March 1, 2013, restricts such 
reallocation.\187\ 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.\188\
---------------------------------------------------------------------------

    \186\ Id. section 2 at 62-66.
    \187\ Id. section 2 at 61-62.
    \188\ 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.\189\ 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.\190\ The Study found that this 
language was often capitalized or in boldfaced type.\191\
---------------------------------------------------------------------------

    \189\ Id. section 2 at 72.
    \190\ Id. section 2 at 72-79.
    \191\ 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; GPR 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.\192\
---------------------------------------------------------------------------

    \192\ 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, 
one-third of GPR 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.\193\ Again, a review of 
consumer agreements without arbitration agreements showed that 10.7 
percent of checking account agreements imposed a one-year time limit 
for consumer claims.\194\ No storefront payday loan, private student 
loan, or mobile wireless contracts in the sample without arbitration 
agreements had such time limits.\195\
---------------------------------------------------------------------------

    \193\ Id. section 2 at 50.
    \194\ Id. section 2 at 51.
    \195\ 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.\196\
---------------------------------------------------------------------------

    \196\ 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).
---------------------------------------------------------------------------

    Comments received regarding the scope of Section 2 are addressed in 
Part III.E below.
2. 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.\197\ 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.\198\
---------------------------------------------------------------------------

    \197\ 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.
    \198\ 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 the respondents' 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.\199\ Almost the same proportion 
of respondents stated that they would simply pay for the improperly 
assessed fee (1.7 percent).\200\ A majority of respondents (57.2 
percent) said that they would cancel their cards.\201\
---------------------------------------------------------------------------

    \199\ Id. section 3 at 18.
    \200\ Id.
    \201\ Id.

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

[[Page 33224]]

    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.\202\ 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.\203\
---------------------------------------------------------------------------

    \202\ Id. section 3 at 15.
    \203\ 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 lacked 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.\204\ 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.'' \205\ 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.'' \206\ 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.\207\ 
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).\208\
---------------------------------------------------------------------------

    \204\ Id. section 3 at 18.
    \205\ Id. section 3 at 18-20.
    \206\ 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 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.
    \207\ Id. section 3 at 18-20.
    \208\ 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.\209\
---------------------------------------------------------------------------

    \209\ Id. section 3 at 21 and 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.
---------------------------------------------------------------------------

Comments Received on Section 3 of the Study
    An industry commenter suggested that the Bureau should conduct 
further analyses to gain a better understanding of consumer 
comprehension with respect to arbitration agreements. The commenter 
asserted that this was appropriate given statements from the Bureau 
that many consumers do not even know that they are bound by an 
arbitration agreement. A different industry commenter thought the 
Bureau should have asked consumers if they would decline to file a 
class action against their credit card issuer because the presence of 
an arbitration agreement would substantially lower their likelihood of 
classwide relief. This commenter also said that, rather than asking 
consumers hypothetical questions about what they would do if an 
improper charge appeared on their account in the future, the Bureau 
should have asked whether such a charge had appeared on a consumer's 
account in the past and, if so, what the consumer did about it. 
Relatedly, an industry commenter suggested that the Bureau should have 
surveyed consumers about their baseline level of understanding of other 
key provisions of their card agreements. With such a baseline, the 
commenter said that the Bureau could have evaluated whether consumers 
pay greater, less, or the same attention to dispute resolution clauses 
as to other clauses important to them--and why that might be so. Absent 
such data, the commenter said that the survey is meaningless.
    A law firm commenter writing on behalf of an industry participant 
suggested that the Study's consumer survey was flawed because the 
Bureau only surveyed credit card consumers and that the Bureau should 
not draw general conclusions about consumers' understanding of dispute 
resolution systems from survey results in a single market in part 
because credit card agreements are often provided simultaneously with 
an access device rather than when a consumer applies for a card. This 
is because, the commenter suggested, that credit card contracts are 
unique, because consumers do not receive the complete loan agreement 
until they receive the card itself.
Response to Comments Received on Section 3
    The Bureau disagrees with the commenter that suggested that the 
Bureau should have conducted further analyses of consumer 
comprehension. The Bureau, in Section 3 of the Study, explored in 
detail consumer comprehension issues with respect to arbitration 
agreements using a nationally representative telephone survey. As is 
discussed in the Study, among other findings, the Bureau determined 
that a majority of respondents whose credit cards include pre-dispute 
arbitration agreements did not know if they could sue their issuers in 
court. Nor does the Bureau agree that asking consumers about their 
likelihood to file a class action given an arbitration agreement would 
result in useful information. As the Study showed, the proposal and 
this final rule discuss, and several industry commenters acknowledged, 
regardless of the level of individual consumer awareness, arbitration 
agreements do in fact have the effect of blocking class actions that 
are filed and suppressing the filing of many more cases, consumers' 
awareness of this fact does not seem relevant. Insofar as cases are 
blocked, further focus on consumers' comprehension of this fact is 
unnecessary.
    The Bureau acknowledges it did not develop a baseline of 
understanding of other key credit card agreement terms. However, the 
Bureau disagrees that the failure to do so renders the survey 
``meaningless.'' The survey found that consumers do not shop for credit 
cards based on the type of dispute resolution process provided in the 
credit card agreement and that consumers do not understand the 
consequences of choosing a card with an arbitration provision. Whether 
consumers have greater or lesser understanding of other

[[Page 33225]]

provisions of credit card agreements does not seem to the Bureau to be 
relevant in assessing whether limitations on the use of arbitration 
agreements is for the protection of consumers and in the public 
interest.\210\
---------------------------------------------------------------------------

    \210\ As is noted in Section 2 at 72 of the Study, many 
arbitration agreements are already printed in bolded text or with 
all capital letters.
---------------------------------------------------------------------------

    Regarding the commenter that suggested that the survey of credit 
card customers cannot be extrapolated to other markets because credit 
card agreements are often provided simultaneously with an access device 
(and not at the time of application), the Bureau disagrees that this is 
a relevant reason not to extrapolate the results of the survey. Even if 
consumers do not receive the terms at the time of application, they do 
receive them before they activate a credit card. At that point, they 
are free to reject the credit card and its terms. The survey showed 
that few make that choice; the Bureau has no reason to believe that 
such a decision is different in other markets. Nor has this or any 
other commenter provided evidence to the contrary.
3. Comparison of Procedures in Arbitration and in Court (Section 4 of 
Study)
    While the Study generally focused on empirical analysis of dispute 
resolution, Section 4 of the Study provided a brief qualitative 
comparison between 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 
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.\211\ 
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.\212\ 
Prior to March 1, 2013, arbitrators in AAA consumer arbitrations had 
discretion to reallocate fees in the final 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.'' \213\
---------------------------------------------------------------------------

    \211\ Study, supra note 3, 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)).
    \212\ Id. section 4 at 11-12.
    \213\ Id.
---------------------------------------------------------------------------

    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.\214\ For 
example, 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.'' \215\
---------------------------------------------------------------------------

    \214\ See, e.g., 15 U.S.C. 1640(a)(3) (TILA).
    \215\ Study, supra note 3, section 4 at 12.
---------------------------------------------------------------------------

    Representation. The Study noted that in most courts, individuals 
can either represent themselves or hire an attorney as their 
representative.\216\ In arbitration, the rules are more flexible than 
in many courts about the identity of party representatives. 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.'' \217\ Some States, however, prohibit 
non-attorneys to represent parties in arbitration.\218\
---------------------------------------------------------------------------

    \216\ Id. section 4 at 13.
    \217\ Id. section 4 at 13-14.
    \218\ 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.\219\ 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.\220\
---------------------------------------------------------------------------

    \219\ Id.
    \220\ 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.\221\
---------------------------------------------------------------------------

    \221\ 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 3, 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 3, 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.\222\
---------------------------------------------------------------------------

    \222\ Study, supra note 3, 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.\223\ The 
Study further noted that the AAA and JAMS have adopted rules, derived 
from Federal Rule 23, for administering arbitrations on a class 
basis.\224\
---------------------------------------------------------------------------

    \223\ Id. section 4 at 18-20.
    \224\ 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 process in that 
there is no particular mechanism for public transparency. Absent an 
agreement by the parties, however, it is not by law required to be 
confidential.\225\
---------------------------------------------------------------------------

    \225\ 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.

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

[[Page 33226]]

    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.\226\
---------------------------------------------------------------------------

    \226\ 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.\227\
---------------------------------------------------------------------------

    \227\ 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.\228\
---------------------------------------------------------------------------

    \228\ Courts may vacate arbitration awards under the FAA only in 
limited circumstances. 9 U.S.C. 10 (arbitration awards can be 
vacated (1) where the award was procured by corruption; the 
arbitrator is partial or corrupt, the arbitrator was guilty of 
misconduct in certain specified ways, the arbitrator exceeded his 
powers or the arbitrator so imperfectly executed his powers that an 
award was not made). Cf. supra notes 104-112 and accompanying text 
(identifying the narrow grounds upon which a court may determine an 
arbitration agreement to be unenforceable).
---------------------------------------------------------------------------

Comments Received on Section 4 of the Study
    A nonprofit commenter criticized the Bureau's analysis of 
arbitration procedures by noting that it is the shortest section of the 
Study and that the Bureau did not attempt to estimate the actual 
transaction cost for consumers in pursuing claims in court as compared 
to arbitration. A research center commenter suggested that the Bureau 
should have performed a more detailed analysis of how judges supervise 
arbitration and how many businesses have adopted provisions similar to 
that at issue in the Concepcion case \229\ because this information 
would aid the Bureau's analysis of the effectiveness of arbitration 
clauses for consumers.
---------------------------------------------------------------------------

    \229\ The arbitration provision at issue in Concepcion provided 
that the company would pay all costs of the arbitration for the 
consumer; that the arbitration would take place in the county where 
the consumer resided or could take place by telephone or document 
submission; that the arbitrator was not limited in the damages it 
could award the consumer; that if the consumer received an award 
that was higher than the company's last written settlement offer, 
the company would have to pay $7,500 in addition to the award; and 
that if the consumer prevailed he could seek double the amount of 
his attorney's fees. AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 
337 (2011).
---------------------------------------------------------------------------

Response to Comments Received on Section 4
    While the review of arbitration procedures was shorter than other 
chapters that report on the results of empirical analyses undertaken 
for the Study, the Bureau believes its analysis to be fulsome; the 
commenter--other than offering the transaction cost criticism as 
discussed in the rest of this paragraph--did not explain what more the 
Bureau's analysis could have done nor did it identify other specific 
topics for analysis. With regard to the comparison of costs, the Bureau 
notes that the Study provided a detailed discussion of the fees a 
consumer would need to pay in (a) Federal court; (b) small claims 
court, using Philadelphia Municipal Court as an example; and (c) 
arbitration, using the AAA and JAMS as examples.\230\ The Bureau notes 
that the Study included a discussion regarding available fee waivers 
for indigent plaintiffs, as well as the ability of the arbitrator to 
reallocate the initial fee distribution.\231\ The Study also assessed 
the frequency with which consumers proceeded without counsel in 
arbitration proceedings and in court proceedings.
---------------------------------------------------------------------------

    \230\ See Study, supra note 3, section 4 at 10.
    \231\ See id. section 4 at 10 n.40 (citing 28 U.S.C. 1915(a)).
---------------------------------------------------------------------------

    As for the commenter that suggested that the Bureau should have 
looked at how judges supervise arbitration, the commenter did not 
explain what additional insights could be gained from such an analysis. 
As for the commenter's contentions regarding Concepcion-like clauses, 
the Bureau notes that Section 2 found such clauses to be rare in 
consumer finance.\232\
---------------------------------------------------------------------------

    \232\ Study, supra note 3, section 2 at 70-71 and tbl. 15.
---------------------------------------------------------------------------

4. 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 
automobile purchase loans. To conduct this analysis, the Bureau used 
electronic case files from the AAA.\233\ Pursuant to 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.\234\ Because the AAA provided the Bureau with case records for 
all disputes filed in arbitration during this period, Section 5 of the 
Study provided a reasonably complete picture of the frequency and 
typology of claims that consumers and companies file in 
arbitration.\235\
---------------------------------------------------------------------------

    \233\ 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); Christopher R. Drahozal 
& Samantha 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).
    \234\ Study, supra note 3, section 5 at 17.
    \235\ While the analysis did 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.\236\ 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 submissions by both the consumer and the company.\237\ Forty 
percent of the arbitration filings involved a dispute over the amount 
of debt a consumer allegedly owed to a

[[Page 33227]]

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.\238\
---------------------------------------------------------------------------

    \236\ Id. section 5 at 9.
    \237\ 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.
    \238\ 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.\239\ In debt disputes, the average disputed debt amount was 
approximately $15,700; the median was approximately $11,000.\240\ 
Across all six product markets, about 25 cases per year involved 
affirmative claims of $1,000 or less.\241\
---------------------------------------------------------------------------

    \239\ Id. section 5 at 10.
    \240\ Id.
    \241\ Id.
---------------------------------------------------------------------------

    Overall, consumers were represented by counsel in 63.2 percent of 
arbitration cases.\242\ 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.\243\
---------------------------------------------------------------------------

    \242\ Id. section 5 at 29.
    \243\ 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.\244\ Among other issues, settlement terms were 
rarely known in cases in which the parties settled their disputes. 
Indeed, 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.\245\ Accordingly, on the one hand, an 
incomplete file could indicate a settlement, or, on the other hand, 
that the proceeding was still in progress but relatively dormant. 
Because parties settled claims strategically, disputes that did reach 
an arbitrator's decision on the merits were not a representative sample 
of the disputes that were filed.\246\ 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.
---------------------------------------------------------------------------

    \244\ Id. section 5 at 4-7. As a result, the Bureau was only 
able to determine a substantive outcome in 341 cases.
    \245\ Id. section 5 at 6.
    \246\ Id. section 5 at 7 (noted 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 noted 
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 
showed that the parties settled. In 34.2 percent of disputes (362 
disputes), the available AAA case record ended in a manner that was 
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 ended in a manner that suggested 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.\247\
---------------------------------------------------------------------------

    \247\ Id. section 5 at 11.
---------------------------------------------------------------------------

    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.\248\ Of these 341 cases, 161 disputes involved an 
arbitrator decision on a consumer's affirmative claim. Of the cases in 
which the Bureau determined the results, consumers obtained relief on 
their affirmative claims in 32 disputes (20.3 percent).\249\ 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).\250\ The total amount of affirmative relief awarded in all 
cases was $172,433 and total debt forbearance was $189,107.\251\ 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 such cases.\252\ With respect to disputes 
that involved company claims in 2010 and 2011, the Bureau determined 
the terms of arbitrator awards relating to company claims in 244 of the 
421 disputes.\253\ 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.\254\
---------------------------------------------------------------------------

    \248\ Id. section 5 at 13.
    \249\ Id.
    \250\ Id.
    \251\ Id. section 5 at 41, 43.
    \252\ Id. section 5 at 13.
    \253\ This includes cases filed by companies as well as cases in 
which companies asserted counterclaims in consumer-initiated 
disputes. Id. section 5 at 14.
    \254\ Of the 244 cases in which companies made claims or 
counterclaims that the Bureau determined 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 
43-44.
---------------------------------------------------------------------------

    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.\255\
---------------------------------------------------------------------------

    \255\ Id. section 5 at 85.
---------------------------------------------------------------------------

    The Study also found that very few class arbitrations were filed. 
The Study identified only two filed with AAA 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.\256\
---------------------------------------------------------------------------

    \256\ Id. section 5 at 86-87. The Study's analysis of class 
action filings identified a third class action arbitration filed 
with JAMS following the dismissal or stay of a class litigation. Id. 
section 6 at 59.
---------------------------------------------------------------------------

    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.\257\ 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

[[Page 33228]]

percent through a dispositive motion with no hearing.\258\ 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.\259\
---------------------------------------------------------------------------

    \257\ Id. section 5 at 71-73.
    \258\ Id. section 5 at 69-70.
    \259\ Id. section 5 at 70-71.
---------------------------------------------------------------------------

Comments Received on Section 5 of the Study
    An industry commenter criticized the Study's review of arbitration 
processes for its failure to assess whether the AAA due process 
protocol was effective in ensuring arbitrator neutrality. The commenter 
suggested that the Bureau could have reviewed decisions of individual 
arbitrators to see if they had a pattern of favoring the companies over 
consumers. This commenter further criticized the Bureau for making no 
effort to evaluate whether arbitrators' decisions were properly 
decided.
    Similarly, a Congressional commenter expressed concern that the 
Study failed to thoroughly analyze and compare arbitration programs and 
program features. The commenter suggested that the Bureau should have 
reviewed whether certain features of arbitration programs produce 
better consumer outcomes and enhance the consumer experience as 
compared to others, but did not identify specifically which features 
warranted additional analysis.
    An industry commenter took issue with the Bureau's assertion that 
the disputes it reviewed involving AAA represent substantially all 
consumer finance arbitration disputes that were filed during the Study 
period, noting that JAMS was named as the administrator at least 50 
percent as often as AAA in the agreements reviewed by the Bureau.
    Another industry commenter suggested that the Study's data 
regarding disputes reached on the merits were not representative of the 
sample because only 32 percent of cases had a judgment on the merits, 
while the rest remained dormant or settled on unknown terms.
Response to Comments on Section 5 of the Study
    With respect to the commenter that criticized the Bureau for not 
evaluating whether certain arbitration programs (such as those that 
limit consumer costs, allow for ``bonus'' awards,\260\ or other 
benefits) provide better consumer outcomes, the Bureau notes that the 
case records available for the Study did not necessarily include the 
terms of the arbitration agreement and that, except for the cases that 
were decided by an arbitrator, the case records also did not include 
the terms of the outcomes. Thus, the analysis of arbitration programs 
(as expressed in arbitration agreements) suggested by this commenter 
was not feasible and, in any event, would not have impacted the central 
finding, discussed below, that an extremely small number of consumers 
avail themselves of any arbitration process under any scheme.
---------------------------------------------------------------------------

    \260\ An example ``bonus'' provision in an arbitration agreement 
would require a company to pay a consumer double or triple the 
company's highest settlement offer if the consumer wins on his or 
her arbitration claim in an amount that exceeds that settlement 
offer.
---------------------------------------------------------------------------

    As to the commenter that criticized the Bureau for not evaluating 
whether arbitrators deciding AAA consumer cases were biased, the Bureau 
notes that, for those cases that were resolved with a written opinion, 
the Study reported whether the decision favored the consumer or the 
financial institution and the amount of the award, if any. The Study 
also explored whether arbitrators favored parties that were repeat 
players before them.\261\ As the Study noted, commentators have long 
raised concerns that such a repeat player bias may occur given 
incentives some arbitrators may have to curry favor while seeking 
future appointments.\262\ The Bureau could not evaluate outcomes in 
cases that settled or cases that were resolved in a manner consistent 
with a settlement. The Bureau also did not evaluate whether 
arbitrators' decisions were ``properly decided'' as the Bureau does not 
believe it would have a basis for making such a determination. As 
discussed in Part VI below, this rulemaking does not rely on a finding 
that arbitration proceedings are fair (or not) but rather that 
consumers do not use arbitration to resolve disputes in any meaningful 
volume.
---------------------------------------------------------------------------

    \261\ Id. section 5 at 56-68.
    \262\ Id.
---------------------------------------------------------------------------

    With respect to the industry commenter that suggested the Study 
undercounted individual arbitration because it studied only those filed 
with the AAA and not JAMS, the Bureau noted in the Study and the 
proposal that JAMS appears to handle a relatively small number of 
consumer finance arbitrations per year. For example, it reported to the 
Bureau that it handled 115 consumer finance arbitrations in 2015 (an 
unknown number of which were filed by consumers as opposed to 
providers),\263\ significantly fewer than the approximately 600 per 
year the Bureau found filed with the AAA in the Study. Thus, the Bureau 
believes that the relevant data supports a conclusion that the AAA 
cases represent a substantial majority of consumer finance arbitrations 
that occur. Further, even if the Bureau were to assume that JAMS 
handled a consumer finance caseload equal to half of the AAA caseload 
(based on the fact that JAMS was named as an administrator about 50 
percent as often as AAA), that would still suggest that there are fewer 
than 900 consumer financial services cases per year as between the two 
largest administrators.
---------------------------------------------------------------------------

    \263\ See 81 FR 32830, 32856 (May 24, 2016); Study, supra note 
3, section 5 at 9.
---------------------------------------------------------------------------

    As for the commenter that contended that the decisions reached on 
the merits are not representative of the whole, the Bureau notes that 
it does not contend otherwise. It noted in the Study that a merits-
decision occurred less frequently than other forms of resolution, such 
as settlement.\264\
---------------------------------------------------------------------------

    \264\ Study, supra note 3, section 5 at 11-12.
---------------------------------------------------------------------------

5. Consumer Financial Litigation: Frequency and Outcomes (Section 6 of 
Study)
    The Study's review of consumer financial litigation in court 
represented, 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.\265\ 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.\266\ 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,

[[Page 33229]]

and captured outcomes reflected on dockets through February 28, 2014.
---------------------------------------------------------------------------

    \265\ See, e.g., Thomas E. Willging et al., ``Empirical Study of 
Class Actions in Four Federal District Courts: Final Report to the 
Advisory Committee on Civil Rules,'' (Fed. Jud. 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), cited in Study, supra note 3, 
section 6 at 19 n.19.
    \266\ Due to resource constraints, the Bureau did not examine 
individual automobile purchase loans. See Study, supra note 3, 
section 6 at 11 n.22.
---------------------------------------------------------------------------

    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.\267\ The Bureau also reviewed 
Federal multi-district 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 large 
counties that had a public electronic database in which complaints were 
regularly available.\268\ 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.\269\ 
Collectively, this State court sample accounted for 18.1 percent of the 
U.S. population as of 2010.\270\
---------------------------------------------------------------------------

    \267\ LexisNexis, ``Courtlink,'' http://www.lexisnexis.com/en-us/products/courtlink-for-corporate-or-professionals.page (last 
visited Feb. 10, 2017).
    \268\ To determine what counties to include in the data set, the 
Bureau started with the Census Bureau's list of the 10 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.
    \269\ Study, supra note 3, appendix L at 71.
    \270\ 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.\271\ 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.\272\ In Federal court class cases, the 
most common claims were under the FDCPA and State statutes prohibiting 
unfair and deceptive acts and practices.\273\ In State court class 
cases, State law claims predominated.\274\ 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 for purposes of comparison 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.\275\ 
The Bureau was able to determine, however, that more than one-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). Only about 10 percent of the 
562 class cases sought statutory damages under Federal statutes that do 
not cap damages available in class proceedings.\276\
---------------------------------------------------------------------------

    \271\ 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.
    \272\ 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. section 6 at 14-15.
    \273\ Id. section 6 at 6.
    \274\ Id.
    \275\ Id. section 5 at 10.
    \276\ Id. section 6 at 22-26. The ``capped'' claims arose from 
five statutory schemes: the Expedited Funds Availability Act, the 
EFTA, the FDCPA, the TILA (including the Consumer Leasing Act and 
the Fair Credit Billing Act), and the 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.\277\ 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 
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.\278\ 
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.\279\ 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.\280\ In addition, while the Bureau believed that its 
data set of State court complaints is the most robust available, the 
Bureau noted the dataset's limitations. For example, the three States 
and seven additional counties from which the Bureau collected 
complaints filed in State court may not be representative of the 
consumer financial litigation filed in State courts nationwide.\281\
---------------------------------------------------------------------------

    \277\ Id. section 6 at 2-5.
    \278\ Id. section 6 at 3.
    \279\ Id.
    \280\ Id. section 6 at 3-4.
    \281\ Id. section 6 at 15 n.34. See also id. appendix L.
---------------------------------------------------------------------------

    In addition to the limitations on comparing case outcomes, the 
Study also noted that even comparing frequency or process across 
litigation and arbitration proceedings was of limited utility.\282\ 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.\283\ 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.\284\ As of April 2016, 
18.1 percent of the filings (102 cases) featured final class 
settlements or class settlement agreements pending approval.
---------------------------------------------------------------------------

    \282\ Id. section 6 at 4.
    \283\ Id.
    \284\ 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.\285\ 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

[[Page 33230]]

motion unrelated to arbitration.\286\ 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.\287\
---------------------------------------------------------------------------

    \285\ 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.
    \286\ Id.
    \287\ 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.\288\ 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.\289\
---------------------------------------------------------------------------

    \288\ 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.
    \289\ 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.\290\ 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.\291\
---------------------------------------------------------------------------

    \290\ 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.
    \291\ 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.\292\ Aside from a handful of individual 
cases transferred to MDL proceedings, individual Federal cases closed 
in a median of approximately 127 days.\293\
---------------------------------------------------------------------------

    \292\ Id. section 6 at 9.
    \293\ 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 
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.\294\ In a comparable set 
of 140 individual disputes, motions seeking arbitration were filed one-
tenth as often, in only 5.7 percent of proceedings.\295\ 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.\296\
---------------------------------------------------------------------------

    \294\ Id. section 6 at 60-61. The court granted motions seeking 
arbitration in 61.5 percent of these disputes.
    \295\ 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).
    \296\ 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. section 6 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).
---------------------------------------------------------------------------

Comments Received on Section 6 of the Study
    One industry lawyer commenter criticized the Bureau's review of 
class action filings for failing to evaluate the underlying merits of 
the class actions and whether they asserted substantive claims or 
instead alleged what the commenter considered technical violations, 
such as improperly worded disclosures. This commenter similarly 
suggested that the Bureau should have evaluated whether class action 
claims were meritorious or whether plaintiffs made frivolous claims to 
attract nuisance value settlements.
    An industry commenter took issue with the fact that the Bureau 
studied 1,800 arbitrations but only a sample of the individual 
litigation cases and asserted that extrapolating from the latter but 
not the former provided an inaccurate picture of the individual 
litigation landscape. The commenter similarly opined that the State 
court class actions studied by the Bureau cannot be relied upon to be 
representative of such litigation nationwide because the Bureau, in the 
Study, acknowledged that they may not be representative of the entire 
country.
    An industry commenter took issue with the small number of instances 
documented in the Study (12) where a dismissed class claim was re-filed 
in arbitration, contending that the Bureau did not research whether 
claims were filed in any arbitration forum other than the AAA.
    Relatedly, an industry commenter expressed concern that the number 
of individual Federal court lawsuits reported in the Study was too low. 
Specifically, the commenter cited records of the Transactional Records 
Access Clearinghouse (TRAC), which is a data gathering and research 
organization at Syracuse University. The commenter asserted, based on 
the TRAC data, that there were 890 consumer credit lawsuits filed in 
Federal district court in May 2012 and 723 such suits filed in 
September 2012.\297\ The commenter also referenced data from a 
commercial litigation monitoring Web site called WebRecon that 
similarly stated that more than 1,000 consumers per month filed suits 
in Federal courts in the years 2010, 2011, and 2012 for violations of 
the TCPA, FCRA, or the FDCPA.\298\ Taken together, the commenter 
asserted these figures as a

[[Page 33231]]

basis to question the accuracy of the Bureau's data.
---------------------------------------------------------------------------

    \297\ TRAC Reports Inc., ``Consumer Credit Civil Findings For 
May 2012,'' (July 12, 2012), available at http://trac.syr.edu/tracreports/civil/285/; TRAC Reports Inc., ``Consumer Credit Card 
Civil Lawsuits Starting to Fall,'' (Nov. 6, 2012), available at 
http://trac.syr.edu/tracreports/civil/298/. According to TRAC, there 
were 890 new ``consumer credit'' lawsuits filed during May 2012, 
most of which asserted claims under FDCPA or FCRA.
    \298\ WebRecon LLC, ``Out Like a Lion. . .Debt Collection 
Litigation and CFPB Complaint Statistics, Dec. 2015 and Year in 
Review,'' available at https://webrecon.com/out-like-a-lion-debtcollection-litigation-cfpb-complaint-statistics-dec-2015-year-in-review/.
---------------------------------------------------------------------------

Response to Comments Received on Section 6
    Regarding the industry lawyer commenter that criticized the Study's 
failure to explore whether class actions assert substantive or 
technical claims, the Bureau notes that the Study did report on the 
types of claims asserted in Federal class actions by statute.\299\ The 
Bureau does not believe that it would be appropriate for it to classify 
claims alleging violations of Federal or State law as ``technical'' or 
not ``substantive.'' Nor does the Bureau believe that it would be 
feasible, given notice pleading requirements, or appropriate for the 
Bureau to assess the merits of the claims asserted in these complaints. 
The Bureau notes that the Federal Rules of Civil Procedure provide 
means of securing dismissal of complaints which, on their face, fail to 
state a valid cause of action and of obtaining summary judgments for 
cases in which there are no genuine issues of material fact and the 
defendant is entitled to judgment as a matter of law. As discussed 
below in connection with Section 8 of the Study, the Bureau reported 
statistics on such dispositive motions in the context of Federal class 
action settlements. The Bureau discusses further judicial safeguards on 
such cases in Part VI Findings below, including by noting legislative 
and judicial safeguards that limit frivolous litigation. The Bureau 
also disagrees with the commenter that said the Study only looked for 
claims re-filed in arbitration in its AAA data. As is explained in 
Section 6 of the Study, the Bureau located nine of the 12 re-filings in 
its review of court filings.\300\ Four of these cases were filed with 
JAMS and five with AAA. The remaining three cases that the Bureau 
identified came from its review of AAA data.\301\
---------------------------------------------------------------------------

    \299\ Study, supra note 3, section 6 at 20 fig. 1 (which shows 
the various legal claims, including Federal statutory, State common 
law, and State statutory claims, asserted in 562 class cases filed 
in Federal and State Court); id. section 6 at 21 fig. 2 (which shows 
the legal claims asserted in the 470 Federal class cases).
    \300\ Id. section 6 at 59.
    \301\ Id.
---------------------------------------------------------------------------

    As for the assertions that the Bureau's analysis undercounted the 
number of individual cases filed in Federal court, the Bureau does not 
believe that the figures cited by the commenters provide a basis on 
which to question the accuracy of the Bureau's data. As is explained in 
detail in Appendix L of the Study, the Bureau completed its analysis by 
first crafting a deliberately overbroad text search in the Courtlink 
database and then manually sorting through that data for cases that fit 
the relevant parameters. The Bureau filtered this data so that it could 
analyze individual claims filed in Federal court with respect to five 
consumer financial products (credit cards, GPR prepaid cards, checking 
accounts/debit cards, payday loans, and private student loans) and 
found approximately 1,200 per year. The TRAC and WebRecon sources 
referenced by the commenter did not, as the Bureau did, analyze each 
case to see whether it fell into one of the five product categories 
analyzed in that part of Section 6. Both databases appear to be based 
on initial case designations made upon filing by a plaintiff. Thus, 
many cases designated as ``consumer credit'' fall outside both the 
parameters of Section 6 and the Bureau's proposed rulemaking. For 
example, not every case filed under the FCRA or the FDCPA and reported 
by TRAC as a consumer credit case concerns a consumer financial product 
or service, and thus TRAC overstates the number of Federal individual 
claims concerning such products. Similarly and as the Bureau noted in 
the proposal, an unknown number of the cases reported by WebRecon also 
would not be covered by the Study or by the proposal rule because that 
database similarly includes all claims under FDCPA, FCRA and TCPA and 
have not been analyzed further. As evidence of the overbroad nature of 
these results, a separate study explained that more than 3,000 TCPA 
claims were filed in 2015 but many of these concerned marketing 
communications unrelated to consumer finance, such as those against a 
merchant or a company with whom the consumer has no relationship 
(contractual or otherwise).
    As for the commenter concerned about the Bureau having 
extrapolating data on individual litigation, the Bureau notes that the 
Study did not purport to analyze all claims about consumer financial 
products filed in Federal court. Thus it agrees that the number of 
individual Federal lawsuits about all of the consumer financial 
products that would be covered by this rule is necessarily higher than 
1,200. The Bureau knows of no reason to view the studied markets as 
materially different than other financial services markets, however, 
with regard to the level of Federal litigation overall, nor does the 
commenter suggest otherwise. As for extrapolating from Federal 
individual lawsuits, the Bureau disagrees that extrapolating data is 
inappropriate. Extrapolation is standard technique used in studies like 
the Bureau's and is typically only inappropriate if there is a reason 
that the data collected is unique. The Bureau does not believe such a 
reason exists regarding its Federal individual court records, nor did 
the commenter identify one.\302\ As for the State court class action 
data, which was drawn from courts representing 18.1 percent of the 
population, the Bureau stated in the Study that the data from the State 
courts analyzed may not be representative of the consumer financial 
litigation filed in State courts nationwide.\303\ Despite the cautious 
language in the Study, the Bureau is not aware of any reason why this 
data are not representative of parts of the country not studied. Below, 
in Part VI, the Bureau discusses the extent to which it relies on this 
data.
---------------------------------------------------------------------------

    \302\ The Bureau collected State court data from parts of New 
York, California, Florida, Utah, Oregon, and Oklahoma. See Study, 
supra note 3, section 6 at 14-15.
    \303\ Study, supra note 3, section 6 at 15 n.34.
---------------------------------------------------------------------------

6. 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 Bureau believes that the Study's review of small claims court 
filings is 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.\304\ The Study, however,

[[Page 33232]]

was the first that the Bureau has been able to identify to assess the 
frequency of small claims court filings concerning consumer financial 
disputes across multiple jurisdictions.
---------------------------------------------------------------------------

    \304\ 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 Mass., Dist. Ct. Dep't 
of the Trial Ct., ``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.\305\ The Bureau 
identified 12 State databases that purport to provide Statewide data 
and that can be searched by year and party name, plus a comparable 
database for the District of Columbia and a database for New York State 
that did not include New York City. This ``State-level sample'' covered 
approximately 52 million people. The Bureau also identified 17 counties 
with small claims court databases that met the same criteria 
(purporting to provide countywide 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'' covered approximately 35 
million people and largely avoided overlap with the State-level 
sample.\306\ The Bureau searched each of these 31 jurisdictions' 
databases for cases involving a set of 10 large credit card issuers 
that the Bureau estimated to cover approximately 80 percent of credit 
card balances outstanding nationwide.\307\ 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.\308\
---------------------------------------------------------------------------

    \305\ Study, supra note 3, section 7 at 5.
    \306\ Id. section 7 at 6.
    \307\ Id.
    \308\ Preliminary Results, supra note 150, at 155 and 156 tbl. 
10.
---------------------------------------------------------------------------

    The Study estimated that, in the jurisdictions the Bureau studied--
with a combined population of approximately 87 million people--
consumers filed no more than 870 disputes in 2012 against these 10 
institutions \309\ (including the three largest retail banks in the 
United States).\310\ This figure included 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.
---------------------------------------------------------------------------

    \309\ Study, supra note 3, section 7 at 9. Due to a 
typographical error in the Study, the combined population of these 
jurisdictions was incorrectly reported as 85 million.
    \310\ 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 10 issuers, and none of the four 
Philadelphia cases were situations where individuals were filing credit 
card claims against one of the 10 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.\311\
---------------------------------------------------------------------------

    \311\ 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.\312\ Based 
on the available data, it is likely that nearly all these cases were 
debt collection claims.\313\
---------------------------------------------------------------------------

    \312\ Id. section 1 at 16.
    \313\ Id.
---------------------------------------------------------------------------

Comments Received on Section 7 of the Study
    One industry commenter asserted that the Bureau had only evaluated 
whether arbitration agreements contained small claims court carve-outs 
and requested that the Bureau re-conduct its Study to, among other 
things, critically analyze the use of small claims court as compared to 
arbitration or class action litigation. The commenter did not 
specifically address the Bureau's analysis in Section 7 of the Study or 
otherwise specify what further type of critical analysis would have 
been appropriate.
    Another industry commenter asserted that the sample size used by 
the Bureau in its analysis of small claims court was too small and that 
this demonstrates a weakness of the Study that undermines the 
credibility of any assertion that consumers rarely proceed individually 
to obtain relief from legal violations. This commenter focused on the 
fact that the Bureau's review was limited to what it considered a small 
number of jurisdictions and only looked at claims against 10 large 
credit card issuers in 2012, asserting that the Bureau thus understated 
the total number of small claims cases. Relatedly, another industry 
commenter expressed concern about the Bureau's limited analysis of 
small claims court cases, emphasizing that the Bureau was able to 
review case documents in only two jurisdictions out of the thousands of 
counties in the United States. However, unlike the prior commenter, 
this commenter was concerned that the data reflected by the Bureau's 
methodology may overstate the number of small claims cases filed by 
consumers against credit card issuers.
Response to Comments on Section 7 of the Study
    The Bureau disagrees that its Study of small claims court was 
limited to an analysis of whether arbitration agreements contain class 
action carve-outs. As is discussed in detail above, the Bureau 
conducted the most fulsome analysis it could practicably conduct of 
consumers' use of small claims court to resolve disputes with their 
providers.\314\ As stated above, the Bureau believes that this is the 
only Study with such a broad scope of jurisdictional coverage that 
analyzes the incidence and typology of consumer financial disputes in 
small claims court to date. This was in addition to--and distinct 
from--Section 2's analysis of companies' use of small-claims court 
carve-outs in their arbitration agreements.
---------------------------------------------------------------------------

    \314\ See id. section 7 at 5-7. Specifically, the Bureau 
analyzed the small claims court cases involving credit card issuers 
with a number of different contractual provisions; some issuers 
analyzed had no arbitration clauses, some had arbitration clauses 
with mutual small claims carve-outs (meaning that both the consumer 
and company had the right to maintain a case in small claims court), 
some had arbitration clauses with a non-mutual small claims carve-
out (meaning that only the consumer had the right to maintain an 
action in small claims court), and one had arbitration provisions 
with no small claims carve-outs. Id.
---------------------------------------------------------------------------

    The Bureau disagrees with the commenter that asserted that the size 
of the sample and the nature of its review of small claims court data 
undermine the Bureau's conclusion that consumers rarely proceed in this 
venue. The commenter did not explain why, given that the Bureau 
analyzed small claims courts in jurisdictions with a combined 
population of approximately 87 million people and found only 870 suits 
in 2012 against these 10 largest credit card issuers, it should be 
expected to find a substantially higher incidence of suits in the other 
portions of the country or against other providers. As is explained in 
the Study's Appendix Q,\315\ no one had previously conducted a sample 
as large as the Bureau's, and the 10 credit card issuers studied 
accounted for 84 percent of credit card outstandings in the Bureau's 
credit card contract

[[Page 33233]]

sample.\316\ Given the modest number of consumer-filed claims found, 
the Bureau does not believe that it is likely that a large number of 
cases were filed in regular State courts or small claims courts against 
providers of consumer financial products or services.\317\
---------------------------------------------------------------------------

    \315\ Id. appendix Q at 117-18.
    \316\ See id. section 3 and section 7 at 6 n.19.
    \317\ For example, in collecting data for Section 6 of the Study 
concerning litigation in court, the Bureau's preliminary research 
suggested that the number of consumer-filed consumer finance cases 
in State court would not be high. Id. appendix L at 70-71 
(explaining that the Bureau considered searching for State cases 
using a contract ``nature of suit'' but ultimately determined that 
the total number of cases in this category would be high while the 
number of consumer-filed cases concerning the products we covered 
would not be).
---------------------------------------------------------------------------

    With regard to the other commenter's concern that the Bureau has 
overstated the number of small claims court cases in the jurisdictions 
it studied, the Bureau pointed out that the 870 cases identified in 
Section 7 constituted a likely upper limit to the number of consumer-
filed small claims court cases against the identified credit card 
issuers.\318\ Indeed, as the Bureau notes in Part VI Findings below, 
the commenter expressed concern at the potential over-counting of 
consumer claims tends to support the Bureau's belief that the number of 
small claims court cases involving credit cards indicates that these 
claims may go unaddressed but for class actions.
---------------------------------------------------------------------------

    \318\ Id. section 7 at 9 (noting that the detailed analysis of 
consumer-filed cases in two jurisdictions led the Bureau to the 
conclusion that ``our broad methodology may well overstate the 
actual number of small claims court cases filed by credit card 
consumers against our sample of issuers.'').
---------------------------------------------------------------------------

7. Class Action Settlements (Section 8 of Study)
    Section 8 of the Study contained the results of the Bureau's 
quantitative assessment of consumer financial class action settlements. 
As described above, Section 6 of the Study, which analyzed consumer 
financial litigation, included findings about the frequency with which 
consumer financial class actions are filed and the types of outcomes 
reached in such cases. 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 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.\319\ 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.\320\
---------------------------------------------------------------------------

    \319\ 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.at 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. at appendix L.
    \320\ 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 overlapped 
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 was larger because it encompassed 
a wider time period (settlements finalized from 2008 through 2012), 
which, among other benefits, decreased the variance across years that 
could be created by unusually large settlements and allowed the Bureau 
to account for the impact of such events as the April 2011 Supreme 
Court decision in Concepcion, which is discussed above.\321\ 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 was the first to 
comprehensively catalogue and analyze class action settlements specific 
to consumer financial markets.\322\
---------------------------------------------------------------------------

    \321\ Concepcion, 563 U.S. at 344.
    \322\ See Study, supra note 3, section 8 at 8-9.
---------------------------------------------------------------------------

    As the Study noted, there were limitations to the Bureau's 
analysis. The Study understated 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.\323\) 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 even if 
claims numbers are not yet final.\324\ In addition, not every 
settlement document contained information on every data point or metric 
that the Bureau sought to analyze; the Study accounted for this by 
referencing, for every metric reported on, the number of settlements 
that provided the relevant number or estimate.\325\
---------------------------------------------------------------------------

    \323\ Id. section 8 at 10.
    \324\ Id. section 8 at 11.
    \325\ 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.\326\ The 
bulk of these settlements (89 percent) concerned debt collection, 
credit cards, checking accounts, or credit reporting.\327\ Of these 422 
settlements, the Bureau was able to analyze 419.\328\ 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),\329\ these 
settlements included 160 million class members.\330\
---------------------------------------------------------------------------

    \326\ Id. section 8 at 9.
    \327\ Id. section 8 at 11.
    \328\ 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.
    \329\ Id. section 8 at 3.
    \330\ Id.
---------------------------------------------------------------------------

    These 419 settlements included cash relief, in-kind relief, and 
other expenses

[[Page 33234]]

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.\331\ 
This estimate included cash relief of about $2.05 billion and in-kind 
relief of about $644 million.\332\ 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.\333\ 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 beyond simply to comply with the 
law.
---------------------------------------------------------------------------

    \331\ Id. section 8 at 4. 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.
    \332\ Id.
    \333\ Id. 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. Again, this 
excludes payment of in-kind relief and any valuation of behavioral 
relief.\334\
---------------------------------------------------------------------------

    \334\ 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.\335\ Of 382 settlements that offered cash relief, the 
Bureau determined that 36.6 percent included automatic cash 
distribution that did not require individual consumers to submit a 
claim form or claim request.\336\
---------------------------------------------------------------------------

    \335\ 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 U. (Dec. 9, 2015). 
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.
    \336\ 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 3, 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.\337\ 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.\338\
---------------------------------------------------------------------------

    \337\ Id. section 8 at 30.
    \338\ 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 the 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.\339\
---------------------------------------------------------------------------

    \339\ Id. section 8 at 36 tbl. 13. 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 included a case study of In re Checking 
Account Overdraft Litigation, MDL No. 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 11 
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.\340\ Another four defendants moved to seek arbitration, but 
ultimately settled; in those cases 8.8 million consumers obtained 
$180.5 million in relief.\341\ Five companies, in contrast, 
successfully invoked arbitration agreements, resulting in the dismissal 
of the cases against them.\342\
---------------------------------------------------------------------------

    \340\ Id. section 8 at 44 tbl. 20. 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.
    \341\ Id. section 8 at 45 tbl. 21.
    \342\ Id. section 8 at 42 tbl. 18.
---------------------------------------------------------------------------

    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 noted, 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.\343\
---------------------------------------------------------------------------

    \343\ Id. section 8 at 39-46. The case record did not reveal how 
many consumers 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.

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

[[Page 33235]]

Comments Received on Section 8 of the Study
    Several commenters, including industry commenters and a nonprofit 
commenter, criticized the Bureau's analysis of class action 
settlements. These commenters cited a working paper by one research 
center that critiqued use of what it called ``aggregate averages'' to 
evaluate the effectiveness of class action cases.\344\ The result, 
according to the nonprofit commenter, was that the Study tended to 
overweight data from a handful of very large settlements in a way that 
overstates the importance of class actions. Relatedly, an industry 
commenter contended that the Study gave undue weight to a few large 
class action settlements. This commenter, several industry commenters, 
and a research center commenter also took issue with the Bureau's 
decision to exclude certain settlements from the Study because the 
settlements did not involve contractual relationships and thus could 
not be blocked by invoking an arbitration agreement (e.g., cases 
involving out-of-network ATM notices) while including debt collection 
class actions which, according to the commenters, also do not typically 
involve a contractual relationship between the debt collector and the 
consumer. Along similar lines, an industry trade association commenter 
took issue with the Bureau's use and analysis of the Overdraft MDL case 
study. According to the commenter, the overdraft cases were atypical 
because, among other things, they settled, they involved automatic 
payouts to class members rather than requiring the submission of 
claims, and they resulted in abnormally large settlements. The 
commenter stated that the Bureau should therefore have excluded the 
cases from its analysis. Furthermore, the commenter asserted that the 
Bureau failed to address critical questions about the overdraft cases, 
including the time spent in litigation before settlement, the net 
present value to consumers of the settlements, and the plaintiff's 
attorney fees. Finally, the research center commenter also contended 
that the Bureau's approach biased the Study by skewing data on 
attorney's fees.
---------------------------------------------------------------------------

    \344\ By aggregate averages, the academic paper suggests that 
the Bureau had computed these averages by counting the number of 
class members paid, and the total amount paid in attorney's fees, 
and dividing those numbers by, respectively, the total number of 
class members and the class payment.
---------------------------------------------------------------------------

    A nonprofit commenter, a research center commenter and several 
industry commenters also criticized the Study for not attempting to 
assess the underlying merit of consumer class actions that result in 
settlements and one of these industry commenters criticized the Bureau 
for not also analyzing the merits of all class actions, not just those 
that settled. The nonprofit commenter noted that the Study did not 
present data regarding which companies were more likely to settle nor 
did the Bureau offer details on what the commenter identified as key 
measures of class action performance. Without this information, 
contended the commenter, readers are unable to know if allowing more 
class actions would actually resolve a societal problem or instead 
would be used to extort settlements from companies for minor violations 
that do not harm anyone. One industry commenter focused on the fact 
that the Bureau did not calculate any actual injury to consumers 
belonging to a class and instead assumed that settlements reflect 
redress for legal violations even though most settlements do not 
include a finding of wrongdoing and some may be settlements to resolve 
nuisance suits. This commenter further expressed concern for, in its 
view, the Bureau's failure to determine if class action claims were 
meritless or frivolous. Relatedly, one of the industry commenters said 
that the Bureau should have evaluated whether class actions were 
brought to address consumer harm as opposed to being motivated by 
attorneys' desire to earn fees (and thus benefits to consumers were 
secondary).
    An industry commenter suggested that Section 8 exceeded the 
Bureau's authority, noting that section 1028(a) required the Bureau to 
study pre-dispute arbitration agreements and did not expressly require 
the Bureau to study class actions and the use of arbitration agreements 
to block class actions.
    Another industry commenter noted that the data set considered in 
this section was for a five-year period and not three years as was used 
in some of the other sections and asserted that this distorted the 
relative importance of class actions. The commenter further noted that 
the data was not restricted to specific consumer financial products and 
services. The commenter also stated that it was difficult to analyze 
unequal or dissimilar data sets and come to an accurate portrait of how 
they compare.
    A research center commenter and an industry trade association both 
expressed concern that the analysis in this section of the Study 
excluded the sums that companies paid attorneys to defend class action 
claims and class actions that did not report payments to class members; 
in other words, they asserted that the Bureau did not present the ``net 
cost'' of class actions in the Study. The commenters argued that the 
Study accordingly substantially underestimated costs incurred by 
companies in connection with class actions. The research center 
commenter further asserted that the Bureau either systematically 
excluded or overstated the benefit of many claims-made 
settlements.\345\
---------------------------------------------------------------------------

    \345\ Relatedly, an industry commenter argued that the Bureau's 
methodology for calculating the percentage of settlement payments 
going to attorney's fees artificially deflated the average amount of 
attorney's fees by lumping large settlements with smaller ones. 
Insofar as the commenter was primarily disputing the Bureau's 
characterization of this data in its analysis, this argument is 
addressed in Part VI.B.3 below.
---------------------------------------------------------------------------

    Finally, an industry commenter suggested that the Bureau's method 
for calculating attorney's fees artificially deflated the average 
amount of attorney's fees reported per case.
Response to Comments Received on Section 8
    In response to the commenters that were concerned with the Bureau's 
use of aggregate averages, the Bureau notes that it did present Section 
8's analyses of class action settlements in a number of different 
segments. This allows the public to avoid any confusion that could be 
caused by aggregating the entire set, and commenters to focus on 
whatever segments they believe to be most relevant. The Study also 
directly addressed potential confusion on aggregate averages by 
providing data on the number of settlements within various ranges of 
gross relief.\346\ Further, the Study included tables that provided 
specific information for, among other variables: Year and type of 
relief (table 7) and 11 different product types (table 8). Regarding 
the comment that suggested that the Study overweights large settlements 
such as the Overdraft MDL, the Bureau believes that rather than 
indicating a problem with the Study, this simply reflects the fact that 
the distribution of class action settlement amounts is right-skewed. 
Commenters suggest no reason why this distribution is unusual. As is 
noted below in Part VI.B.3, there continue to be large class action 
settlements in consumer finance.
---------------------------------------------------------------------------

    \346\ Study, supra note 3, section 8 at 26 fig. 4 (noting that 7 
settlements provided over $100 million in gross relief; 23 
settlements provided between $10 million and $100 million in gross 
relief; 58 settlements provided between $1 million and $10 million 
in gross relief; 127 settlements provided between $100,000 and $1 
million; and 204 settlements provided less than $100,000 in relief).
---------------------------------------------------------------------------

    As for the related concern about the Bureau's inclusion of certain 
class actions that commenters thought should have been excluded, the 
Bureau

[[Page 33236]]

similarly provided data in different forms to allow interested persons 
to tally the figures and omit cases as they see fit.\347\ In other 
words, if an interested person was concerned about the Bureau's 
inclusion of a particular category, such as the overdraft or debt 
collection cases, the data were presented in a way that allowed that 
person to consider the data without those cases. Also, as suggested in 
Part VI.B.3, below, the Bureau believes that even if these categories 
of class action settlements were excluded from the data, the Bureau's 
conclusion as to the efficacy of class settlements generally would not 
change. In any event, the Bureau chose to include debt collection cases 
because a debt collector normally seeks to collect a debt based on a 
contract and may be able to invoke an arbitration clause if one is 
contained in the original credit agreement.\348\ By contrast, the cases 
involving ATM disclosures involved no contract between the merchant and 
consumer, and thus no arbitration agreement could be used to block 
cases filed by customers.
---------------------------------------------------------------------------

    \347\ For example, if this commenter wanted to analyze 
consumers' recovery without including debt collection cases, the 
Study makes that possible. See Study, supra note 3, section 8 at 25 
tbl. 8 (noting that debt collection cases resulted in $96.82 million 
in total relief). Doing so would reduce the total payout to 
consumers by $97 million to $2.6 billion. Id.
    \348\ See id., section 6 at 56 n.96; SBREFA Report, infra note 
419, at 17 n.23 (noting that debt collector small entity 
representatives informed the Bureau that, in certain cases, if the 
underlying credit agreement contains an arbitration clause, a debt 
collector may be able to compel arbitration).
---------------------------------------------------------------------------

    In response to the commenter that took issue with the Bureau's use 
and analysis of the Overdraft MDL case study, the Bureau believes that 
overdraft cases were not atypical in offering automatic payouts to 
class members.\349\ Nor were the overdraft settlements abnormally 
large--just two of the seven largest settlements identified in the 
Study were Overdraft MDL cases.\350\ The Bureau also believes that the 
commenter did not explain why its litany of other questions on the 
overdraft cases warranted these cases' exclusion from the Study. In any 
event, the data the commenter sought for the overdraft cases are within 
the normal range of values set out in the Study.\351\
---------------------------------------------------------------------------

    \349\ Study, supra note 3, section 8 at 20 (identifying 140 
settlements that provided automatic relief, or 37 percent of 
settlements); id. section 8 at 22 (noting that nearly 24 million 
class members received automatic relief); id. section 8 at 28 n.46 
(noting that $709 million was paid out to class members in automatic 
cash distribution cases).
    \350\ Id. section 8 at 28 n.47 (citing Order of Final Approval 
of Settlement, Tornes v. Bank of America NA (In re Checking Account 
Overdraft Litig.), No. 08-23323 (S.D. Fla. Nov. 22, 2011) and Order 
of Final Approval of Settlement, Lopez v. JP Morgan Chase NA (In re 
Checking Account Overdraft Litig.), No. 09-23127 (S.D. Fla. Dec. 19, 
2012).
    \351\ Id. section 8 at 36-37 (measuring days elapsed from 
complaint to final settlement); Id. section 8 at 32-35 (providing a 
range of attorneys fee percentages by settlement relief size and 
product type).
---------------------------------------------------------------------------

    As for the commenters that asserted that the Bureau did not review 
the merits of all class actions or just those that resulted in 
settlements, as noted above in connection with Section 6 of the Study, 
the Bureau notes that the Study analyzed the closest proxies for merit 
possible--the filing and disposition of summary judgment motions and 
motions to dismiss preceding final class action settlements.\352\ The 
commenters were correct to the extent that the Bureau did not attempt 
to evaluate the merits of claims resolved in class action settlements. 
The Bureau did not believe it possessed any greater ability to do so 
than the parties that had agreed to settlements or the courts that 
reviewed them. In any event, as with all litigation settlements, 
parties made their own judgments about the case in assessing and 
agreeing to a settlement. The relationship between merit and 
settlements is discussed further in Part VI, below.
---------------------------------------------------------------------------

    \352\ See id. section 8 at 38 tbls. 15 and 16.
---------------------------------------------------------------------------

    With respect to the industry commenter concerned that the Bureau's 
Study was too expansive and exceeded its section 1028(a) authority--by 
studying class actions in addition to arbitration--the Bureau believes 
that its analysis is relevant to performance of its charge under 
section 1028(a) and notes that a number of responses by industry and 
consumer commenters alike to the Bureau's initial request for 
information strongly urged the Bureau to study class action 
litigation.\353\ One of the commenters that responded to the original 
request for information, a coalition of industry trade associations, 
specifically requested that the Bureau study whether class actions 
provided meaningful benefit to individual consumers as compared with 
individual arbitration. The Bureau agreed with this commenter because, 
in its view, the only way to assess whether arbitration agreements 
adequately protect consumers is to evaluate others means of consumer 
protection. This includes class actions, the blocking of which is a 
motivator for and key result of companies' use of arbitration 
agreements.
---------------------------------------------------------------------------

    \353\ See supra Part III.A.
---------------------------------------------------------------------------

    Regarding the Bureau's selection of a five-year period review of 
class actions, the Bureau studied the longest time periods practicable 
for the various individual components of the Study consistent with 
electronic data availability and other Bureau resource limitations. As 
it explained in the Study and the proposal, the fact that it was 
practicable to study a broader time range for Section 8 of the Study 
had a number of advantages, including the ability to account for 
significant background shocks such as the financial crisis and the 
Supreme Court's decision in Concepcion in 2011, as well as for the fact 
that the results of settlements may not be reported to courts for some 
time.\354\ Also, a longer time period decreased the variance across 
years that could be created by unusually large settlements. Further, 
the Study set forth data by year and by claim in numerous tables and 
figures, so that outside parties could analyze specific data sets, 
particularly if they wanted to focus on or exclude specific financial 
products and services.\355\
---------------------------------------------------------------------------

    \354\ See Study, supra note 3, section 8 at 37 tbl. 14 
(reporting that average time to final settlement after initial 
filing was 690 days and median time was 560 days).
    \355\ See, e.g., id. section 8 at 12 tbl. 1 (setting forth 
settlement incidence by product and by year).
---------------------------------------------------------------------------

    With regard to concerns raised by the research center commenter, as 
discussed further below in Part III.E, the Bureau notes that data about 
defense attorney costs is not publicly available. The Bureau further 
determined that it would be too difficult or impossible to gather 
additional information on any uniform basis about defense costs, given 
that at least some of this information may be considered subject to 
attorney-client privilege. The Bureau made clear that it was seeking to 
study ``transaction costs in consumer class actions,'' and firms that 
had been involved in defending class actions could have produced data 
on their transaction costs during the Bureau's Study process but did 
not. Nor has any such data been provided to the Bureau in response to 
the notice of proposed rulemaking.\356\ As for not studying class 
actions for which data was unavailable, this limitation was noted in 
the Study; the Bureau was only able to study cases for which data could 
be located.\357\ For cases the Bureau could find, the data gathered, at 
minimum, establishes a floor for the amount of money recovered by 
consumers in class actions.
---------------------------------------------------------------------------

    \356\ The Bureau's Section 1022(b)(2) Analysis attempts to 
address this issue, below. See also Study, supra note 3, section 8 
at 24 tbl. 7.
    \357\ Study, supra note 3, section 8 at 10-11; see generally id. 
appendices R and S.
---------------------------------------------------------------------------

    Finally, with regard to the concern related to the method used to 
report attorney's fees, the Bureau notes that the

[[Page 33237]]

Study reported data regarding attorney's fees in a number of different 
ways--including by comparing them to cash relief, to gross relief, and 
by product type. To the extent that the commenter suggested that the 
Bureau is drawing the wrong conclusion from this data, the Bureau 
addresses that argument below in Part VI.
8. Consumer Financial Class Actions and Public Enforcement (Section 9 
of Study)
    Section 9 of the Study explored the relationship between private 
consumer financial class actions and public (governmental) enforcement 
actions. As Section 9 noted, 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 analyzed the 
extent to which private class actions overlapped with government 
enforcement activity and, when they did overlap, which types of actions 
came 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.\358\ The Bureau 
did this by reviewing Web sites for all Federal regulatory agencies 
with jurisdiction over consumer finance matters, for the State 
regulatory and enforcement agencies in the 10 largest and 10 smallest 
States, and for four county agencies in those States to identify 
reports on public enforcement activity over a period of five years from 
2008 through 2012.\359\ 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 (including cases filed before 2008 and after 2012) and searched 
the pleadings in those cases.\360\
---------------------------------------------------------------------------

    \358\ Id. section 9 at 5 and appendix U at 141.
    \359\ The analysis included review of enforcement activity 
conducted by the Bureau, the Federal Trade Commission, 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 3, appendix U at 
141-142. See supra note 156 (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).
    \360\ Study, supra note 3, section 9 at 7.
---------------------------------------------------------------------------

    Second, the Bureau essentially performed a similar search over the 
same period, 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 plaintiff's 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.\361\
---------------------------------------------------------------------------

    \361\ Id. section 9 at 8-10.
---------------------------------------------------------------------------

    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.\362\ The Study 
similarly found that, where private parties brought a class action, an 
overlapping government enforcement action existed in only a minority of 
cases, and rarely existed 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.\363\
---------------------------------------------------------------------------

    \362\ Id. section 9 at 4.
    \363\ Id.
---------------------------------------------------------------------------

    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.\364\
---------------------------------------------------------------------------

    \364\ Id.
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Comments Received on Section 9 of the Study
    Several industry commenters stated that, in their view, the Study 
was flawed because the Bureau did not properly consider the impacts its 
own enforcement activities have on providers. For example, one of these 
commenters stated that the Bureau only reviewed AAA arbitrations 
resolved during what it termed the Bureau's ``formative stage'' and 
asserted that the Study was therefore skewed because it did not take 
into account the Bureau's enforcement actions in later years. Another 
commenter criticized the Bureau for failing to account for the impact 
that other Bureau activities--interim final and other finalized 
rulemakings, amicus briefs, etc.--would have on providers, and asserted 
that further study of these impacts is warranted.
    An industry commenter took issue with what it believed to be an 
overly narrow focus in this Section 9 of the Study that overlooked 
several key points. For example, this commenter said that the Bureau 
should have evaluated how many class actions are a result of other 
disclosures of wrongdoing (e.g., news reports) and thus the filing of a 
class action did not function as a disclosure mechanism informing the 
company of its potential wrongdoing. In addition, the commenter said 
the Bureau should have evaluated how many class actions followed 
government investigations or other disclosures of claimed wrongdoing, 
rather than focusing only on how many class actions overlapped with 
public enforcement actions. The commenter

[[Page 33238]]

noted that in some instances government enforcement agencies declined 
to bring an action even where they identified wrongdoing.
Response to Comments on Section 9 of the Study
    As to the comments that criticized the scope of the Bureau's 
analysis of its own enforcement actions, noting that the Bureau 
increased its enforcement activity after 2012, such comments assume 
that the purpose of the analysis was to assess the overall level of 
public enforcement and compare it to the volume of class action 
activity. To the extent that there has been, and will continue to be, 
an increase in Bureau enforcement actions relative to the Study period, 
the Bureau knows of no reason to believe that the relationship between 
public and private enforcement will change, nor did any commenter 
suggest a basis for so believing.\365\ As is discussed in greater 
detail in Part VI below, Section 9 demonstrated that there was 
generally little overlap between these two spheres, and to the extent 
there is, private activity generally precedes public activity. As was 
discussed in that section, the Bureau believes that these data 
indicated--as supported by the comments from a group of State attorneys 
general and the Bureau's experience and expertise--that private class 
actions are a useful complement to public enforcement actions, 
especially given the resource limitations faced by regulators or that 
may be faced by regulators in the future. With respect to whether the 
Bureau considered other of its undertakings, the Bureau does not 
believe that there is an adequate means to do so and, more importantly, 
that such an undertaking would not be relevant to this rulemaking.\366\
---------------------------------------------------------------------------

    \365\ The Bureau notes that it did not in fact limit its data to 
public enforcement cases announced or filed prior to December 31, 
2012. As the methodology to the Study set out, the public 
enforcement data started with two different sets of cases as a 
starting point to analyze overlap. The Bureau analyzed a set of 
public enforcement cases between 2008 and 2012 for overlapping 
private cases that may have occurred before or after 2012. The 
Bureau also analyzed a set of private class actions from 2008 
through 2012 for overlapping public enforcement cases that may have 
been filed or announced before 2008 or after 2012. As such, in this 
second set, any public enforcement cases filed or announced after 
December 31, 2012 would have been included in the data. See Study 
supra note 3, appendix U at 145-146.
    \366\ To the extent the commenter asserted that the Bureau 
should have looked at the magnitude of its enforcement efforts in 
later years after the Bureau was more established as opposed to 
earlier years in support of an argument that class actions are 
superfluous given the Bureau's activities, that argument is 
addressed below in Part VI.
---------------------------------------------------------------------------

9. Arbitration Agreements and Pricing (Section 10 of Study)
    Section 10 of the Study contained the results of a quantitative 
analysis which explored whether arbitration agreements affected 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.\367\ However, as the Study 
noted, there is little empirical evidence to support either 
position.\368\
---------------------------------------------------------------------------

    \367\ Compare, e.g., Amy J. Schmitz, ``Building Bridges to 
Remedies for Consumers in International eConflicts,'' 34 U. Ark. L. 
Rev. 779, at 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, 
Unconscionablility, and Equilibrium, The Return of Unconscionability 
Analysis as a Counterweight to Arbitration,'' 19 Ohio St. J. on 
Disp. Resol. 757, at 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.'').
    \368\ Study, supra note 3, 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.\369\ In these 
Ross settlements, which were negotiated separately from settlements in 
the case 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 a half 
years.\370\ Using data from the Bureau's Credit Card Database,\371\ the 
Bureau examined whether it could find statistically significant 
evidence, at a standard confidence level (95 percent), that companies 
that removed their arbitration agreements raised their prices as 
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.\372\
---------------------------------------------------------------------------

    \369\ See First Amended Class Action Complaint, In re Currency 
Conversion Antitrust Litig., No. 1409 (S.D.N.Y. June 4, 2009).
    \370\ Study, supra note 3, section 10 at 6.
    \371\ The Bureau's Credit Card Database 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 7-8.
    \372\ See id. section 10 at 5-6. 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 15-16.
---------------------------------------------------------------------------

    The Bureau performed a similar inquiry into whether the 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 noted 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.\373\ 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.\374\
---------------------------------------------------------------------------

    \373\ Id. section 10 at 17.
    \374\ Id. section 10 at 6.
---------------------------------------------------------------------------

Comments Received on Section 10 of the Study
    An industry commenter and a trade association dismissed the 
Bureau's findings in Section 10, asserting that the Ross case did not 
provide an appropriate case study because changes in bank pricing are 
slow to occur and because credit cards issuers would not be expected to 
shift their pricing in response to a temporary ban on arbitration 
agreements in any event. The trade association commenter contended that 
the Bureau understated the problems with its difference-in-difference 
analysis of pricing changes. For example, the commenter questioned the 
Bureau's selection of a control group due to its admission that it did 
not know if all members of the control group used arbitration 
agreements. Also, citing two academics, the commenter stated that the 
lack of evidence of a price change was unsurprising given the temporary 
nature of the moratorium and, as noted above, that large institutions 
like the Ross settlers typically change prices slowly. A research 
center commenter expressed a similar concern.
    A nonprofit commenter, citing to an academic working paper, 
contended that the Study failed to indicate whether the Bureau checked 
to ensure the validity of the econometric technique it used in 
evaluating price changes. This commenter also criticized the Bureau's 
method as valid only if prices had been

[[Page 33239]]

changing at the same rate prior to the settlement in Ross.
    An individual commenter criticized the conclusions that the Bureau 
drew from its analysis, and asserted that footnote 34 in Section 10 of 
the Study demonstrated that the Ross settlement did in fact prompt 
differential pricing responses from the banks involved and that such a 
result comports with economic expectation. The commenter further 
asserted that the Bureau improperly dismissed this result as 
statistical noise that disappeared once costs were collapsed into a 
single total cost of credit (TCC) variable. In reality, the commenter 
asserted, the Bureau's analysis implied that the banks increased other 
costs charged to consumers as evidenced by the separate regression 
analyses with respect to APR and fees. This commenter also suggested 
that a number of other events that happened around the same time as the 
Ross settlement--e.g., the enactment of the CARD Act and the Dodd-Frank 
Act, Supreme Court litigation regarding the applicability of the FAA, 
and other ongoing class action lawsuits--may have also had varying 
effects on companies' use of arbitration agreements and pricing 
decisions. The commenter asserted that consumers who did not trigger 
the currency conversion fees that were specifically at issue in Ross 
suffered as a result of these differential changes, and that such 
consumers were more likely to be low-income, unmarried, and members of 
racial and ethnic minorities. Accordingly, the commenter asserted that 
the Bureau's analysis in fact suggested that dropping the arbitration 
agreements led to more expensive credit for certain groups of 
consumers.
    An industry commenter noted that the Bureau's analysis in this 
section focused only on large banks and did not account for small 
institutions' practices, which the commenter suggested may be 
different. The commenter noted that the Study more generally found that 
larger institutions were more likely to use arbitration agreements and 
asserted that there may be a relationship between using arbitration and 
providing credit to many more consumers, especially those with poor 
credit (as large institutions may be more likely to do). The commenter 
concluded that this might mean that the class proposal could harm 
credit access for poorer consumers. A research center made a similar 
point, stating that empirical evidence shows that consumer finance 
companies do pass on changes in their costs but that banks are unlikely 
to adjust their deposit and loan rates quickly or fully to reflect only 
temporary changes in market interest rates. This commenter also 
suggested that firms in the consumer services sector adjust prices much 
more slowly in response to cost changes than do firms in the 
manufacturing sector, and large firms adjust prices more slowly than do 
small firms.
    Another industry commenter stated that, in its view, there was not 
statistically significant empirical support to generalize the findings 
in this section beyond the specific Ross case. This commenter accused 
the Bureau of using what it labeled as a bizarre methodology and of 
inappropriately extrapolating results from the behavior of an arbitrary 
and small group of providers. The commenter concluded that the results 
in Section 10 were overly handicapped by caveats and other 
uncertainties that did not extend across all providers in all markets. 
Relatedly, an industry commenter suggested that the conclusions of this 
section ignored case study evidence that shows consumers would choose a 
lower priced product that includes an arbitration clause as opposed to 
a higher priced one that lacked an arbitration clause.
Response to Comments on Section 10 of the Study
    The purpose of Section 10 was to explore the suggestion by some 
that companies' use of arbitration agreements lowers prices for 
consumers. The analysis then conducted found no evidence to support 
that claim. As the Bureau explained in the Study, analyzing whether 
pre-dispute arbitration agreements lower the price of consumer 
financial products or services is extremely difficult. The Bureau 
continues to believe that it made sense to analyze the Ross case as a 
potential natural experiment, although it could not provide a complete 
answer to the underlying question. The Bureau continues to believe that 
it used an appropriate methodology in analyzing those results and 
concluding that it did not demonstrate statistically significant 
evidence that the issuers increased prices or reduced access to credit. 
Nevertheless, the Bureau notes that Section 10 does not form the basis 
for any of the Bureau's significant findings, which are discussed in 
greater detail in Part VI below. Instead, the Bureau finds that there 
is some amount (although the specific amount is unknown) of costs from 
the class rule that will be passed on to consumers. See also Section 
1022(b)(2) Analysis, below.
    With regard to criticism of the methodology, the Bureau notes that 
its regression analysis was designed to control for effects that could 
have impacted pricing if the credit card companies had changed their 
prices for any number of external factors.\375\ This is because the 
analysis did not just evaluate whether there was a change in pricing, 
but rather looked instead to see if the change in pricing of the Ross 
settlers sample differed from the change in pricing of the other banks 
that were subject to the same external background factors. The Bureau's 
analysis also looked at multiple time periods spanning 2008 through 
2011, in part to account for the possibility that any price adjustments 
by the Ross settlers may have taken place over a relatively long period 
of time.\376\ The Bureau acknowledged in both the Study and the 
proposal that the Ross settlement was time limited and that it is 
possible that the banks who were subjected to the settlement might have 
taken that fact into account in deciding their pricing strategy going 
forward.\377\ This is an inherent limitation in the data.
---------------------------------------------------------------------------

    \375\ See id. section 10 at 12.
    \376\ Id. section 10 at 14 (setting forth the time frames used 
in the analysis). The Bureau does not necessarily agree, however, 
that credit card pricing is slow moving; to the contrary, in the 
Bureau's experience the pricing offered in credit card solicitations 
is quite dynamic and at least some large card issuers make frequent 
adjustments of their fees to the extent permitted by law.
    \377\ See id. section 10 at 15-16.
---------------------------------------------------------------------------

    As to the commenter that expressed concern that the Bureau had 
never ensured the validity of its econometric technique, the Bureau 
believes that the commenter misunderstood the nature of the difference-
in-difference analysis used. In the analysis, the control group was 
neither companies with arbitration clauses nor was it companies that 
did not have arbitration clauses. Rather, the control group was 
companies that did not change their use of arbitration provisions, 
either because they used arbitration provisions through the entire 
period or they did not use arbitration provisions through the entire 
period. The treatment group was the Ross settlers who did change their 
use of arbitration provisions. The Bureau believes that this comparison 
was effective because it was not comparing the absolute pricing of the 
different issuers but instead was comparing the rate at which they 
changed their pricing during the time period. The Bureau further notes 
that nothing indicated that the treatment group--the issuers that 
changed their use of arbitration provisions--changed their pricing in a 
statistically significant way vis-a-vis the control group.\378\ 
Consequently, the Study did not find evidence that the

[[Page 33240]]

companies that had to stop using arbitration provisions changed their 
pricing in any meaningful way as compared to people that did not have 
to do so.
---------------------------------------------------------------------------

    \378\ See id. section 10 at 15.
---------------------------------------------------------------------------

    As to the nonprofit commenter's point that the Bureau's technique 
in this analysis was valid only if prices had been changing at the same 
rate prior to the settlement in Ross, the Bureau notes that the 
technique used does assume that the two groups of companies changed 
pricing at the same rate before the imposition of the moratorium 
(controlling for a number of variables).\379\ Thus, the Bureau's 
analysis assumed that banks changed pricing at the same rate 
notwithstanding the items controlled for.
---------------------------------------------------------------------------

    \379\ See list of factors set out in Appendix V of the Study at 
page 148.
---------------------------------------------------------------------------

    As to the individual commenter that expressed concern about other 
impacts on pricing and arbitration agreements beyond the Ross 
settlement, the Bureau's analysis attempted to control for a number of 
variables. Specifically, the benefit of conducting a difference-in-
differences analysis is that it should account for background effects 
like the CARD Act, the Dodd-Frank Act, the development of law over 
time, and pending litigation. The Bureau notes that it did not state 
that the analysis was ``problematic,'' but simply set out limitations 
of the analysis, as it did with regard to each section of the 
Study.\380\
---------------------------------------------------------------------------

    \380\ Id. section 10 at 18-19. The latter analysis accounts for 
the possibility that initial changes in credit output would begin 
with subprime accounts.
---------------------------------------------------------------------------

    In response to this commenter's assertion that the Bureau did find 
a difference and buried it in footnote 34, the Bureau believes that the 
commenter was really disagreeing with the use of TCC as the appropriate 
metric.\381\ As the Bureau explained, pricing involves numerous 
components that work together to represent total cost. For example, a 
provider can raise interest rates but lower fees and still have the 
same TCC. All that footnote 34 stated was that given the number of 
regressions run, it was likely that at least one of the trials would 
produce statistically significant coefficients on the various dependent 
variables simply by chance. Nevertheless, the Bureau continues to 
believe that TCC was the appropriate metric because it represents 
everything that consumers pay to keep and use their credit cards.\382\ 
Finally, as to the individual commenter concerned that the Study did 
not account for higher interest rates that disproportionately impact, 
among others, low-income households, the Bureau notes that its analysis 
in Section 10 controlled for credit score and refreshed credit score 
(both square and log terms for each) as well as for borrower income but 
did not find statistically significant results for TCC overall.\383\ 
Similarly, when the Bureau studied whether there were limitations on 
credit issuance, it used two measures--initial credit line and subprime 
account issuance--and still did not find any statistically significant 
changes.\384\
---------------------------------------------------------------------------

    \381\ As was stated in the Study, the TCC ``metric incorporates 
all fees and interest charges the consumer pays to the issuer. It 
excludes revenue generated through separate agreements between other 
businesses and the issuer, such as interchange fees paid by 
merchants and marketing fees or commissions paid by companies 
offering add-on products to an issuer's customer base. This TCC 
metric thus capture all of the component costs that consumers pay.'' 
Id. section 10 at 9 (quoting ``CARD Act Report,'' (2013)), available 
at http://files.consumerfinance.gov/f/201309_cfpb_card-act-report.pdf.
    \382\ See Study, supra note 3, section 10 at 9.
    \383\ See generally id. at appendix V. The Bureau did find some 
differences for subcomponents of TCC, but none were found to 
contradict the overall price effect. See id. section 10 at 15 n.34.
    \384\ Id. section 10 at 18-19.
---------------------------------------------------------------------------

    The Bureau agrees, as an industry commenter noted, that its 
analysis in this section was limited to very large banks. The Bureau 
addresses cost concerns specific to small entities below. Regarding the 
commenter's theory regarding access to credit for those with poor 
credit, the Bureau reiterates, as is noted above, that it had a number 
of controls for consumer credit that would have detected a particular 
effect on subprime consumers. The Bureau also acknowledges that there 
are a number of factors, as one commenter identified, that impact when 
and how banks decide to adjust pricing mechanisms.
    The Bureau disagrees with the contention that its definition of the 
control group was invalid. As was explained in the Study, the control 
group contained entities that had no change in their use of arbitration 
agreements; whether they did or did not use such an agreement was not 
relevant. This group was then compared to those entities required to 
withdraw arbitration agreements as a result of the Ross settlement in 
order to diagnose whether this required change resulted in a price 
shock. The Bureau disagrees with the industry commenter regarding 
extrapolation from the results of Section 10; the Bureau did not engage 
in such extrapolation. In any event, the Bureau acknowledges the 
caveats it made in the Study and, notwithstanding those caveats, stands 
by the results.
    Finally, regarding the commenter that said that the conclusion of 
this section was at odds with other available evidence, the Bureau 
explains below in Part VI the relevance of this part of the Study to 
its overall findings in this rulemaking.

E. Additional Comments Received Regarding the Study and Responses 
Regarding the Study

    The Bureau notes that it received numerous comments from members of 
Congress, consumers, consumer advocates, academics, nonprofits, 
consumer lawyers and law firms, public-interest consumer lawyers, State 
legislators, State attorneys general, and others that expressed 
confidence in the Study and the Bureau's methods. Many of these 
commenters noted the Study's comprehensiveness; a few noted that it 
appeared to be the most comprehensive study of dispute resolution in 
connection with consumer financial services completed to date.
    One nonprofit commenter challenged the Bureau's Study for its 
alleged failure to comply with the requirements of the Information 
Quality Act \385\ and a related OMB bulletin,\386\ asserting that the 
Study should have undergone a rigorous, transparent peer review process 
to ensure the quality of the disseminated information. Similarly this 
commenter and a trade association representing credit unions, expressed 
concern about the Bureau's lack of a peer review process and about the 
fact that no entity other than the Bureau attempted to replicate the 
Study. The trade association commenter also expressed concern that the 
Bureau had not conducted a study of general consumer satisfaction with 
consumer financial products and services.
---------------------------------------------------------------------------

    \385\ Information Quality Act, Public Law 106-554, Sec.  515, 
114 Stat. 2763, 2763A-153-154 (2000); see Office of Mgmt. & Budget, 
``Information Management: Information Quality Guidelines,'' 
available at https://www.opm.gov/information-management/information-quality-guidelines/.
    \386\ Memorandum from Joshua B. Bolten, Dir., Office of Mgmt. & 
Budget, to Heads of Departments and Agencies concerning Issuance of 
OMB's ``Final Information Quality Bulletin for Peer Review,'' OMB 
Bulletin No. M-05-03 (Dec. 16, 2004), available at https://obamawhitehouse.archives.gov/omb/memoranda_fy2005_m05-03/.
---------------------------------------------------------------------------

    Several other industry commenters criticized the Bureau for not 
soliciting public comments during the course of the Study process. In 
the view of one commenter, such a process could have enabled the Bureau 
to address defects and other problems with the Study before its 
conclusion. The industry commenters stated that the Bureau had never 
informed the public of the topics it had decided to study, never sought 
public comment on them, and never convened a public roundtable 
discussion on key issues. These

[[Page 33241]]

commenters concluded that having not undertaken these steps, the Study 
was flawed and does not support the proposal.
    Several industry commenters stated that the Bureau should have 
studied consumer satisfaction with the arbitration process through, for 
example, interviews of consumers who have arbitrated claims and who had 
been involved in class actions. One of these commenters also stated 
that the Bureau should have evaluated consumer experience with 
arbitration in other areas, such as employment, where it has existed 
longer.\387\ Several industry commenters asserted that the Bureau's 
intentional refusal to study consumers' experience with arbitration was 
perplexing because both logic and common sense dictated that 
understanding consumer satisfaction with arbitration is essential to a 
complete understanding of whether mandating consumer arbitration was in 
the public interest. In support of this viewpoint, one commenter cited 
a 2005 Harris Interactive online poll that found that consumers found 
arbitration to be faster, simpler and cheaper than proceeding in court 
and that they would use arbitration again.
---------------------------------------------------------------------------

    \387\ Relatedly, an industry commenter expressed concern that 
the Bureau did not explain in the proposal why contracts for 
consumer financial products and services differed from other markets 
where arbitration would still be permitted to block class actions. 
The Bureau expresses no opinion on the role of arbitration 
agreements in markets beyond the scope of its authority.
---------------------------------------------------------------------------

    One industry commenter suggested that the Bureau should have also 
studied the impact on consumers and society if companies abandon 
arbitration as well as the costs to consumers and society of the 
additional 6,042 class actions that the proposal's Section 1022(b)(2) 
Analysis projected would be filed every five years. This commenter 
further noted that the Bureau did not study whether class actions are 
necessary as a deterrent given the impact of modern social media, 
explaining that in modern society providers have enormous incentive to 
ensure that their customers are satisfied and any disputes resolved 
fairly because dissatisfaction can be amplified on social media.
    Another industry commenter challenged the Bureau's failure to 
survey market participants regarding their views on the deterrent 
effect of class action litigation.
    A letter from some members of Congress urged the Bureau to gather 
more data on consumer outcomes.\388\ Other comments expressed similar 
concerns. For example, one industry lawyer commenter suggested that the 
Study should have evaluated arbitration as a dispute resolution 
mechanism as compared to litigation for individual claims that are 
inappropriate for class action treatment. This commenter noted that the 
Bureau did not appear to consider the FTC's 2010 Study entitled 
``Repairing a Broken System: Protecting Consumers in Debt Collection 
Litigation and Arbitration.'' \389\ The FTC's 2010 Study, suggested the 
commenter, criticized litigation as a dispute resolution mechanism and 
suggested that the Bureau consider this criticism in any regulatory 
effort that results in an increase in litigation. This same commenter 
also suggested that the Bureau should have examined a number of other 
items. Specifically, this commenter (along with another industry 
commenter) suggested that the Bureau should have studied whether there 
is any difference in the level of compliance between financial services 
companies with and without provisions in their contracts that can block 
class actions. The industry commenter suggested that the Bureau should 
have studied the effectiveness of its complaint process as a means of 
resolving consumers' issues. The industry lawyer commenter suggested 
that data to evaluate this might be reflected in the number or type of 
complaints received by the Bureau regarding each type of company. 
Similarly, the commenter also suggested that the Bureau should have 
studied whether class actions are the most efficient method of 
enforcing the law as compared to enforcement actions, although the 
commenter did not address how the Bureau should have gone farther than 
it did in Section 9.
---------------------------------------------------------------------------

    \388\ In explaining this request, the authors of this letter 
referred to a June 2015 letter that stated that, in the authors' 
view, the Bureau did not study transaction costs associated with 
pursuing a claim in Federal court as compared to arbitration or the 
ability of a consumer to pursue a claim in Federal court or 
arbitration without an attorney.
    \389\ Fed. Trade Comm'n, ``Repairing a Broken System: Protection 
Consumers in Debt Collection Litigation,'' (July 2010), available at 
https://www.ftc.gov/reports/repairing-broken-system-protecting-consumers-debt-collection-litigation.
---------------------------------------------------------------------------

    Another industry commenter stated that, in its view, the Study 
could have been more comprehensive. This commenter listed a number of 
additional items that it contended the Bureau should have studied, 
including the evaluation of what it said were the advantages of 
arbitration in handling the most typical types of consumer complaints 
(which the commenter asserted were overcharges, duplicative charges, 
and other errors); in providing a less formal and more accessible forum 
to consumers; in the speedy resolution of claims; in actual monetary 
awards to claimants; and in aggregate cost to participants and related 
cost-savings; resolution of arbitrations without the involvement of 
counsel; and in consumer satisfaction. This commenter further 
criticized the Bureau for not making similar inquiries regarding class 
actions.
    Several commenters, including an industry lawyer, a nonprofit, a 
group of State attorneys general, and two industry trade associations, 
criticized the Study (and the proposal) for drawing comparisons between 
settlements of class actions and decisions in arbitrations. These 
commenters all suggested that the Bureau could have drawn a more 
accurate comparison by comparing arbitration settlements with class 
action settlements. One of these commenters, a group of State attorneys 
general, noted that the Bureau had acknowledged that 57.4 percent of 
arbitrations were known or likely to have settled and asserted that it 
was reasonable to assume that the cases that settled were stronger 
claims. Some of these commenters also suggested that the Bureau should 
have evaluated class arbitration. The group of State attorneys general 
also noted that the Bureau's data on arbitration outcomes and class 
actions settlements was incomplete because the Bureau only had data for 
20.3 percent of arbitrations and 60 percent of settlements. Relatedly, 
an industry commenter criticized the Bureau for focusing only on filed 
and adjudicated arbitrations, rather than those that settled or that 
were never filed in the first instance because a consumer achieved 
relief as a result of informal dispute resolution. A Congressional 
commenter also asked why the Bureau had not considered arbitration 
settlements in its Study.
    Several industry commenters criticized the Study for comparing data 
regarding arbitration awards for a two-year period (2010 through 2011) 
to class action settlements over a five-year period (2008 through 
2012). One commenter noted that the Bureau compared the fact that 34 
million consumer class members received $1.1 billion in compensation 
over those five years to only 32 arbitration awards to consumers (that 
the Bureau could verify) for a total of only $172,433. This comparison 
is misleading, suggested the commenter, because it omitted arbitrations 
that resulted in a confidential settlement. This commenter further 
asserted that the Study was misleading because it reported the

[[Page 33242]]

percentage recovery received by consumers who succeeded in arbitration 
(57 cents for every dollar), but did not report similar figures for 
payouts to consumers in class actions.
    The Bureau received comments from several specific industry groups 
that variously asserted that the Study had omitted a fulsome analysis 
of their particular market or provider type. For example, a trade 
association commenter representing credit unions asserted that the 
Bureau studied only a small number of credit unions and criticized it 
for not engaging in more fulsome analyses of small entities more 
generally in its Study. A credit union commenter also expressed concern 
that most of the Bureau's analysis in Section 2 (prevalence) did not 
adequately represent products offered by credit unions and that there 
was limited evidence that credit unions use arbitration agreements. 
Relatedly, a trade association representing online lenders noted that 
its members were excluded from Section 2, although it acknowledged that 
its members almost uniformly used arbitration agreements and several 
installment lenders noted that both online and installment lenders were 
missing from Section 2.
    A Tribal commenter asserted that the Bureau should have consulted 
with Tribal entities in order to understand how the Tribal governments 
resolve disputes and that the Bureau should have focused on Tribal 
businesses in various sections of the Study. Relatedly, a different 
Tribal commenter asserted that the Bureau did not examine Tribal 
dispute resolution and procedures or Tribal regulations that protect 
consumers.
    Additionally, an industry trade association representing companies 
that are consumer reporting agencies (CRAs) said that the Bureau should 
have more fulsomely included CRAs in the Study in general and credit 
monitoring cases against CRAs and litigation pursuant to the Credit 
Repair Organizations Act (CROA) in particular. Although the commenter 
noted that the Bureau's analyses of class actions (in Section 8) 
included CRAs, it focused on the Bureau's failure to analyze individual 
disputes involving CRAs. The commenter further noted that credit 
reporting constituted one of the four largest product areas for class 
action relief but the Bureau did not define the scope of credit 
reporting class actions, and the Bureau only mentioned credit 
monitoring twice in its Study.
    An industry trade association representing automobile dealers, 
asserted that the Bureau's Study contained virtually no information on 
automotive financing, and that what little evidence there was suggested 
that the Bureau did not understand the automotive finance industry. The 
commenter concluded that the Study's findings as to the automotive 
finance market were, at best, ``murky.''
    An industry commenter suggested that the Bureau should have, but 
did not, conduct an analysis of how arbitration and class actions 
operate in the ``real world'' and what the relative trade-offs are for 
consumers between each dispute resolution mechanism. Relatedly, the 
commenter expressed concern that the Study failed to balance adequately 
the actual benefits of the arbitration process against the costs of 
class-action lawsuits and the likely impacts of the proposal. An 
industry commenter criticized the Bureau for failing to study the 
impact of the proposal on online dispute resolution services and other 
methods of informal dispute resolution.\390\ This commenter said that 
the Bureau overlooked what is potentially a large universe of consumer 
disputes that are addressed outside the courtroom, a universe far 
broader than what was addressed in the Study. Relatedly, an industry 
commenter suggested that the Bureau should have studied informal 
dispute resolution in addition to formal dispute resolution and a 
research center suggested that the Bureau's survey should have asked 
questions about informal dispute resolution. An industry commenter took 
issue with the Bureau's failure to study defense costs incurred by 
companies in defending class actions. The commenter asserted that the 
Dodd-Frank Act requires such an analysis. The commenter further 
asserted that the Bureau's assumptions in the Study regarding defense 
costs--that they are about 75 percent of the amounts awarded to 
plaintiff's attorneys in settled class actions and 40 percent in other 
cases--were ill-conceived.
---------------------------------------------------------------------------

    \390\ This commenter specifically referenced Modria. Modria is a 
company that offers online customer response and dispute resolution 
services and purports to handle more than 60 million disputes a 
year. See Modria, ``The Modria Platform,'' http://modria.com/product/ (last visited March 13, 2017).
---------------------------------------------------------------------------

    An industry commenter asserted that the Study did not adequately 
assess the role of consumer choice--presumably for products with or 
without arbitration agreements. This commenter also stated that the 
Study should be re-conducted to evaluate the economic impact on 
providers and consumers of regulations that prohibit the use of class 
action waivers.
Response to General Comments on Study
    In response to concerns about the Bureau's compliance with the 
Information Quality Act, the Bureau did comply with the IQA's standards 
for quality, utility, and integrity under the IQA Guidelines.\391\ 
Moreover, the Study did not fall within the requirements of the OMB's 
bulletin on peer review, contrary to what the commenter suggested. The 
bulletin applies to scientific information, not the ``financial'' or 
``statistical'' information contained in the Study.\392\ The Federal 
financial regulators, including the Bureau, have consistently stated 
that the information they produce is not subject to the bulletin.\393\
---------------------------------------------------------------------------

    \391\ See Bureau of Consumer Fin. Prot., ``(Bureau) Information 
Quality Guidelines are Issued in Accordance with the Provisions of 
the Treasury and General Government Appropriations Act for Fiscal 
Year 2001, Public Law 106-554 (the ``Act'') and OMB Government-wide 
Guidance,'' https://www.consumerfinance.gov/open-government/information-quality-guidelines/ (last visited May 19, 2017).
    \392\ See OMB Bulletin, supra note 386.
    \393\ See Bureau Information Quality Guidelines, supra note 385.
---------------------------------------------------------------------------

    Although the Bureau did not engage in formal peer review, it did 
include with its report detailed descriptions of its methodology for 
assembling the data sets and its methodology for analyzing and coding 
the data so that the Study could be replicated by outside parties. The 
Bureau is not aware of any entity that has attempted to replicate 
elements of the Study; to the extent that the Bureau's analysis has 
been reviewed by academics and stakeholders those individual critiques 
are addressed above. The Bureau has monitored academic commentary in 
addition to the comments submitted and continues to do so.
    With respect to the claim that the Bureau did not provide notice of 
the scope of the Study, the Bureau notes that, although not required to 
do so by Dodd-Frank section 1028(a), the Bureau did, in fact, issue a 
request for information before commencing the Study to solicit public 
input with respect to its scope and the sources of data to which the 
Bureau should look.\394\ Moreover, the Bureau released the Preliminary 
Results in late 2013, and at that time the Bureau listed the remaining 
topics it intended to study, thus providing clear public visibility 
into the Study's eventual scope. Furthermore, the Bureau held periodic 
meetings with stakeholders before, during, and after the Study (as 
discussed further in Part IV below) and

[[Page 33243]]

received ongoing input regarding the appropriate Study scope.
---------------------------------------------------------------------------

    \394\ See Arbitration Study RFI, supra note 16.
---------------------------------------------------------------------------

    As for the commenters concerned that the Bureau did not conduct a 
study of consumer satisfaction with their consumer financial products 
and services, the Bureau believes that even if it were to find very 
high levels of satisfaction, that would not affect the assessment of 
the various alternative dispute resolution mechanisms, especially given 
the potential for claims to go undiscovered by consumers. With respect 
to the concern that the Bureau did not evaluate consumer satisfaction 
with the arbitration process, the Bureau notes that it did not do so 
for several reasons. First, given the small number of consumers who 
participated in arbitration proceedings, it would have been difficult 
and costly to construct a sample of such consumers and obtain 
statistically reliable results. Second, it would have been difficult to 
distinguish consumer satisfaction with the process from consumer 
satisfaction with the outcome in particular cases. Thus, if a consumer 
received a poor or no settlement or award in an arbitration, he or she 
might view the process unfavorably even if the underlying claim was 
objectively poor and merited little relief. The opposite would also be 
true.\395\ Third, given the finding that so few consumers brought 
individual claims in arbitration, the satisfaction of that small number 
of consumers who ultimately did use the process (assuming enough could 
be located to make a study of their satisfaction reliable) would not 
answer the question of whether all consumers should be limited to using 
arbitration to resolve disputes.
---------------------------------------------------------------------------

    \395\ The Bureau also finds the Harris Interactive poll cited by 
this commenter to be irrelevant because over 80 percent of 
respondents were individuals who chose to arbitrate claims rather 
than being compelled to litigate. See Study, supra note 3, section 3 
at 5 n.5. See Harris Interactive Mkt Res., ``Arbitration: Simpler, 
Cheaper, and Faster than Litigation, A Harris Interactive Survey,'' 
(Apr. 2005) (conducted for U.S. Chamber Institute for Legal Reform), 
available at HarrisInteractiveSurveyforUSChamberofCommerce.pdf. Nor 
did this survey ask respondents their opinions about being blocked 
from filing or participating in a class action.
---------------------------------------------------------------------------

    With respect to the related argument that the Bureau should have 
conducted a survey comparing consumers' experiences in arbitration as 
compared to class actions, the Bureau believes that it would have been 
exceedingly difficult to find consumers who had experienced 
arbitration, and any comparison in consumer experiences with 
arbitration and a class action would have suffered from selection bias 
(i.e., consumers who prevailed using one of the dispute resolution 
mechanisms would be more likely to express satisfaction with that 
mechanism). In any event, as is discussed further below in Part VI, the 
Bureau does not believe that consumers' relative satisfaction with a 
dispute resolution mechanism that they use quite infrequently should be 
afforded as much weight as the fact that the Study showed, and many 
commenters agreed, that arbitration agreements can preemptively limit 
consumers' ability to resolve disputes in class actions. Nor does the 
Bureau believe that other things that commenters suggested the Bureau 
should have studied were relevant or feasible (or both). As for 
studying the impacts on society of additional class actions and the 
potential loss of arbitration as a means of dispute resolution, these 
impacts are addressed in the Bureau's Section 1022(b)(2) Analysis.
    As to those comments that criticized the Study for failing to 
compare dispute resolution outcomes, the Bureau carefully explained why 
such a comparison was neither feasible (because of the large volume of 
settlements or potential settlements where the outcome could not be 
determined) nor meaningful (because of potential selection bias in the 
choice of forum and in the cases that did not settle.)
    In response to the industry lawyer commenter's criticism that the 
Bureau did not consider the FTC's 2010 Study of debt collectors' use of 
arbitration and litigation, the Bureau did review the FTC's 2010 Study 
in the course of analyzing materials for the 2015 Arbitration Study 
and, in any case, the Bureau believes the FTC's 2010 Study to be 
relevant to this rulemaking in offering background information on the 
use of arbitration in debt collection disputes brought against 
consumers.\396\ The focus of the Bureau's Study and subsequent 
rulemaking, in contrast, is on the ability of consumers to seek 
affirmative relief for claims relating to consumer products and 
services--in other words, claims brought by consumers against their 
providers.
---------------------------------------------------------------------------

    \396\ Fed. Trade Comm'n, ``Repairing a Broken System: Protection 
Consumers in Debt Collection Litigation,'' (July 2010), available at 
https://www.ftc.gov/reports/repairing-broken-system-protecting-consumers-debt-collection-litigation.
---------------------------------------------------------------------------

    With respect to the claim that the Bureau should have further 
studied the value or necessity of class actions in deterring 
misconduct, the Bureau does not believe that a survey of companies or 
their representatives on this issue would have produced reliable 
information.
    The Bureau believes that the review it undertook of how companies 
and their representatives respond to the filing and settlement of class 
actions, as discussed further below in Part VI, is much more probative 
than self-serving survey results. And, as set out below in Part VI.B, 
the Bureau believes that social media are insufficient to force 
companies to change company practices--because, among other reasons, 
many consumers do not know that they have valid complaints or how to 
raise their claims through social media. Further, in at least one 
study, companies ignored nearly half of the social media complaints 
consumers submitted, and when companies did respond, consumers were 
dissatisfied in roughly 60 percent of the cases.\397\
---------------------------------------------------------------------------

    \397\ Sabine A. Einwiller & Sarah Steilen, ``Handling Complaints 
on Social Network Sites--An Analysis of Complaints and Complaint 
Responses on Facebook and Twitter Pages of Large US Companies,'' 41 
Pub. Rel. Rev. 195, at 197-200 (2015).
---------------------------------------------------------------------------

    Regarding the commenter that suggested that the Bureau should have 
evaluated whether there is a different level of compliance for 
companies that use arbitration versus those that can be sued in a class 
action and that such an analysis can be conducted by review of the 
Bureau's complaint database, the Bureau disagrees with the premise of 
the comment; simple comparisons across companies that use arbitration 
versus those that do not, cannot be made using complaint data. The 
Bureau also notes that the largest volume of complaints concerns debt 
collectors, whose ability to invoke arbitration agreements is 
derivative of the clients they serve; credit reporting companies, which 
may not have contracts or arbitration agreements with consumers; and 
mortgage lenders and servicers, who generally are not covered by 
arbitration agreements. Additionally, the Study found that in certain 
markets--including GPR prepaid cards, payday loans, private student 
lending, and mobile wireless third-party billing--arbitration 
agreements are so common that it would be all but impossible to make 
the comparisons suggested. In response to the dual suggestions that the 
Bureau's consumer complaints database could be used to benchmark the 
compliance of providers with consumer laws or that the Bureau's 
complaints mechanism itself could be used as a form of dispute 
resolution instead of class actions, the Bureau observes that some 
industry commenters had opposed the Bureau's publication of consumer 
complaint narratives on the grounds that the

[[Page 33244]]

Bureau's consumer complaint database contained unrepresentative 
data.\398\
---------------------------------------------------------------------------

    \398\ Bureau of Consumer Fin. Prot., Disclosure of Consumer 
Complaint Narrative Data, Final Policy Statement, 80 FR 15572, 15576 
(Mar. 24, 2015) (``Industry commenters, by contrast, asserted that 
the publication of narratives in the Database would mislead 
consumers because the data is, in the commenters' words, unverified 
and unrepresentative.''). While the Bureau did not agree that such 
data was unverified, the Bureau in response focused on the impact 
the Bureau's complaints database would have on customer service and 
helping companies improve their compliance mechanisms generally. See 
id. (``In general, the Bureau 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.'').
---------------------------------------------------------------------------

    As to whether class actions are superior methods of enforcing the 
law as compared to government enforcement, the Bureau does not believe 
this is a necessary subject of study. The more relevant question is the 
relative overlap between the two mechanisms and the extent to which 
class action cases pursue harms not otherwise addressed by government 
enforcement. Moreover, regardless of the outcome of this rulemaking, 
government enforcement will continue. The Bureau believes it more 
appropriate to compare, as the Study did, consumers' ability to achieve 
relief individually and as part of a class action. The question, 
analyzed in detail below, is whether government enforcement remedies 
all harms in the relevant markets or if class actions supplement 
government enforcement.\399\
---------------------------------------------------------------------------

    \399\ See Consumer Financial Class Actions and Public 
Enforcement (Sections 8 and 9 of Study) discussion above.
---------------------------------------------------------------------------

    In response to comments that criticized the Bureau for comparing 
outcomes in arbitration obtained through arbitral decisions (but not 
settlements) to class action settlements, the Bureau notes that the 
Study specifically cautioned that the two types of data were derived 
from different sources and should not be compared as apples to 
apples.\400\ The Bureau conducted a fulsome analysis of all data that 
it could obtain but had no way to measure settlements of arbitrations 
that were not reported to the administrator. The Bureau notes that 
commenters did not suggest any way to overcome this limitation in the 
underlying record. Regarding the State attorneys general that commented 
on the incomplete nature of the Bureau's data on arbitration and class 
action outcomes, the Bureau notes that it expressly acknowledged the 
limitations of these data in the Study.\401\
---------------------------------------------------------------------------

    \400\ See Study, supra note 3, section 5 at 6-7.
    \401\ See, e.g., id. section 5 at 4-8.
---------------------------------------------------------------------------

    The Bureau also disagrees that it overlooked the role of online 
dispute resolution. The Bureau had no direct way of studying the extent 
to which consumers were able to resolve disputes informally, and the 
Study specifically acknowledged that this is a means by which consumers 
may seek relief.\402\ The Bureau did, however, use its case study of 
the Overdraft MDL to evaluate the extent to which informal dispute 
resolution obviated the need for a class action mechanism.\403\ As this 
case study showed, even after deductions were made for previously-
provided informal relief, there was still nearly $1 billion in relief 
provided to more than 28 million consumers in the class. This indicated 
that even if every consumer who sought informal relief was successful, 
most consumers were still without a remedy until they received a share 
of the class action settlement. For further discussion of 
individualized resolution of consumer disputes, see Part VI.B below.
---------------------------------------------------------------------------

    \402\ The online dispute resolution service referenced by the 
commenter purports to offer services to ``ecommerce'' companies, 
i.e., merchants, which are excluded from the Bureau's authority. See 
Modria.com, Inc., ``About Us,'' http://modria.com/about-us/ (last 
visited March 10, 2017).
    \403\ See Study, supra note 3, section 8 at 39-46
---------------------------------------------------------------------------

    As to the commenters that said that the Bureau should not have 
compared two years of arbitration data to five years of class action 
data, the Bureau studied arbitration records for the longest period 
practical given electronic data limitations. Although the Bureau could 
have similarly confined its study of class actions, the Bureau believed 
that studying settlements over a longer time period would provide more 
robust data to support firmer findings. The differences between the 
number of consumers involved in arbitration actions and individual 
actions of any type as compared to the number of consumers that 
benefited from class actions and the damages awarded in each were so 
stark as to mitigate any concerns about the difference in the time 
periods studied.\404\ As a more technical point, the Bureau also notes 
that the commenter was not correct that the Bureau looked at only two 
years of arbitration data. The Bureau studied three years of 
arbitration filings, from 2010 to 2012, and two years of available 
arbitration outcomes for cases that were filed in 2010 and 2011 (i.e., 
the cases may not have been resolved in those years). As is explained 
in the Study, that window was chosen because 2010 was the first year 
that electronic records were available from the AAA.\405\ As is further 
explained, when the Bureau conducted an analysis of the arbitration 
records (in 2013) complete records for many of the disputes that had 
been filed in 2012 were unavailable because those cases had not yet 
been resolved.\406\
---------------------------------------------------------------------------

    \404\ Doubling the number of consumers successful in AAA 
arbitrations filed in 2010 and 2011 would raise the number of 
successful consumers 32 to 64.
    \405\ Study, supra note 3, section 5 at 17 n.30.
    \406\ Id. section 5 at 11 n.17.
---------------------------------------------------------------------------

    Regarding the commenter that said that the Bureau was misleading by 
reporting percentage recovery in arbitration but not in class actions, 
the Bureau notes that it was only able to do the former because the AAA 
requires that the filing party specify the dollar amount of his or her 
claim in an arbitration.\407\ Similar disclosures are typically not 
required by Federal or State court rules and are rarely included in 
class action complaints.\408\ Accordingly, the Bureau was unable to 
calculate recovery rates for court proceedings.\409\
---------------------------------------------------------------------------

    \407\ Id. section 5 at 20-28.
    \408\ Id. section 6 at 3, 33-54.
    \409\ The Bureau did attempt to do this analysis. Of 78 Federal 
individual cases where there was a result for the consumer, we could 
identify information about a monetary award in 75 cases. Of those 75 
cases, the complaint included an allegation with a claim amount in 
only four cases. See id. section 6 at 49.
---------------------------------------------------------------------------

    Regarding the focus of the Bureau on providers in specific 
categories, such as Tribal lenders, credit unions, online lenders, 
providers of automobile financing, and CRAs (including credit 
monitoring), the Bureau included in the Study those products and 
services offered by these providers to the extent that data was 
available and that these providers were relevant to each section of the 
Study. For example, to the extent a credit monitoring class action 
settlement occurred during the Study period, it is included in the 
analysis in Section 8. With respect to the Study's approach to credit 
unions, the Bureau notes that its review of credit cards in Section 2 
included agreements offered by credit unions to the extent that credit 
unions are represented in the credit card agreement database mandated 
under the CARD Act.\410\ The Bureau's review of deposit account 
agreements included agreements from the 50 largest credit unions. As is 
discussed in the Section 1022(b)(2) Analysis below, the Bureau notes 
that to the extent that the commenter was correct in its assertion that 
credit unions do not offer many products with arbitration agreements, 
the impact of this rule will be

[[Page 33245]]

minimal.\411\ As for online lenders, while the Bureau agrees that it 
did not specifically analyze this category in Section 2, it notes that 
the trade association commenter acknowledged in its letter that its 
members have arbitration agreements that can be used to block class 
actions. To state this another way, the Bureau did not specifically 
exclude any products or services because of the entity that offered 
it--whether Tribal, governmental or otherwise--although in some cases 
data were not specifically available for specific types of providers. 
As for Tribal regulations concerning dispute resolution, the Bureau 
focused its description on AAA and JAMS standards as the two largest 
arbitration administrators. As for the suggestion that the Bureau 
should have studied Tribal consumer protection laws, the Bureau did not 
study any particular jurisdiction's consumer protection laws and in any 
case, the commenter did not suggest the specific ways in which such 
Tribal laws would be meaningfully different from laws in other 
jurisdictions.
---------------------------------------------------------------------------

    \410\ Id. section 5 at 13.
    \411\ The SBREFA Report further details the potential impact of 
this rule on small entities, including credit unions that are small. 
See SBREFA Report, infra note 419, at 23-32.
---------------------------------------------------------------------------

    Regarding the comment that the Bureau should have conducted a 
``real world'' analysis of arbitration and class actions and tradeoffs 
of each, the Bureau believes that the Study did attempt such an 
analysis. Specifically, it attempted to catalogue the cost, benefits, 
and efficacy (in terms of consumers involved) of each mechanism. 
Further, as is discussed in greater detail in the Section 1022(b)(2) 
Analysis below, the Bureau has considered the impacts on consumers and 
providers of the final rule it is adopting. To the extent that the 
commenter was concerned that the Study did not evaluate the relative 
merits of each mechanism, the Bureau believes that such an evaluation 
is better suited to the rulemaking process where it can consider the 
impacts of potential policy options. See Part VI Findings, below.
    The Bureau does not agree, as one industry commenter suggested, 
that Dodd-Frank section 1028(a) required it to study defense costs. In 
any event, as set out above in Section III.D, above, the Bureau 
determined that it would be too difficult to gather additional 
information on any uniform basis about defense costs, given that at 
least some of this information may be considered privileged by 
companies. Further, as set out above, the Bureau made clear that it 
sought ``transaction costs in consumer class actions,'' but the Bureau 
received no such data from firms during the Bureau's Study process or 
in response to the proposal.
    The Bureau did attempt to project such costs based on the best data 
available to it, and discussed their significance in the sections of 
the proposal analyzing whether it was in the public interest and for 
the protection of consumers and the proposal's potential impacts on 
covered persons and consumers under section 1022 of the Dodd-Frank Act. 
To the extent that the commenter's primary objection was to the 
significance that the Bureau accorded defense costs in its analyses, 
those are discussed in Part VI.C below.\412\
---------------------------------------------------------------------------

    \412\ During the Study process, the Bureau sought comment on 
whether a study of defense costs could be undertaken, but the Bureau 
received no useful comment on this point. Arbitration Study RFI, 
supra note 16.
---------------------------------------------------------------------------

    As to the commenter that urged the Bureau to study class 
arbitration, the Bureau notes that the Study addressed class 
arbitration in several ways. First, Section 2 addressed the percentage 
of arbitration agreements that allowed for class arbitration in the six 
product markets studied (the vast majority prohibit it).\413\ Second, 
Section 4 reviewed AAA's and JAMS' class arbitration procedures.\414\ 
Third, Section 5 reviewed the few consumer finance class arbitrations 
that did occur.\415\
---------------------------------------------------------------------------

    \413\ See Study, supra note 3, section 2 at 46 tbl. 7.
    \414\ See id. section 4 at 20.
    \415\ See id. section 5 at 86.
---------------------------------------------------------------------------

    As for the commenters that suggested that the Bureau should have 
studied informal dispute resolution, the Bureau notes that the Study 
did address informal dispute resolution in a number of contexts. For 
example, as noted above in the discussion of Section 8, the Bureau 
noted the impact of previously-resolved informal disputes on the 
overall amount paid out by the settling banks in the MDL overdraft 
litigation. The Bureau also considered the significance of the 
availability of informal dispute resolution mechanisms in both the 
proposal's Section 1028 proposed findings and Section 1022(b)(2) 
Analysis, and in their counterparts for the final rule below. In any 
event, the commenters did not specify what about informal dispute 
resolution the Bureau should have studied.
    As for the commenter that asserted that the Bureau should have 
studied the role of consumer choice, the Bureau notes that the Study's 
consumer survey did address this question. Whether this should impact 
the rulemaking is addressed below in Part VI. Regarding the commenter's 
contention that the Bureau should have studied the economic impact of 
its proposal, the Bureau notes that Section 10 did attempt to analyze 
the likelihood that class action costs would be passed on to consumers. 
The Bureau also refers the commenter to the proposal's and this rule's 
Section 1022(b)(2) Analysis.

IV. The Rulemaking Process

A. Stakeholder Outreach Following the Study

    As noted, the Bureau released the 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.\416\ 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 final rule.
---------------------------------------------------------------------------

    \416\ As noted above, the Bureau similarly invited feedback from 
stakeholders on the Preliminary Results published in December 2013. 
In early 2014, the Bureau also held roundtables with stakeholders to 
discuss the Preliminary Results. 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 (OMB).\417\ 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.\418\

[[Page 33246]]

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.
---------------------------------------------------------------------------

    \417\ 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).
    \418\ Bureau of Consumer Fin. Prot., ``Small Business Advisory 
Review Panel for Potential Rulemaking on Arbitration Agreements: 
Outline of Proposals Under Consideration and Alternatives 
Considered,'' (Oct. 7, 2015), available at http://files.consumerfinance.gov/f/201510_cfpb_small-business-review-panel-packet-explaining-the-proposal-under-consideration.pdf; Press 
Release, Bureau of Consumer Fin. Prot., ``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/.
---------------------------------------------------------------------------

    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 
proposal on those entities. Those findings and recommendations are set 
forth in the Small Business Review Panel Report (SBREFA Report), which 
is being made part of the administrative record in this 
rulemaking.\419\ The Bureau has carefully considered these findings and 
recommendations in preparing this proposal and addresses certain 
specific issues that concerned the Panel below.
---------------------------------------------------------------------------

    \419\ Bureau 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.
---------------------------------------------------------------------------

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 of the SBREFA Outline at a public meeting of the Bureau's 
Consumer Advisory Board (CAB) and solicited feedback from the CAB on 
the proposals under consideration.\420\
---------------------------------------------------------------------------

    \420\ See Bureau of Consumer Fin. Prot., ``Advisory Groups,'' 
http://www.consumerfinance.gov/advisory-groups/advisory-groups-meeting-details/ (last visited May 17, 2017); see also Bureau of 
Consumer Fin. Prot., ``Washington, DC: CAB Meeting,'' YouTube (Oct. 
23, 2015), https://www.youtube.com/watch?v=V11Xbp9z2KQ.
---------------------------------------------------------------------------

D. The Bureau's Proposal

    In May 2016, in accordance with its authority u section 1028 and 
consistent with its Study, the Bureau proposed regulations that would 
govern agreements that provide for the arbitration of any future 
disputes between consumers and providers of certain consumer financial 
products and services. The comment period on the proposal ended on 
August 22, 2016.
    The proposal would have imposed two sets of limitations on the use 
of pre-dispute arbitration agreements by covered providers of consumer 
financial products and services. First, it would have prohibited 
providers from using a pre-dispute arbitration agreement to block 
consumer class actions in court and would have required providers to 
insert language into their arbitration agreements reflecting this 
limitation. This proposal was based on the Bureau's preliminary 
findings--which the Bureau stated were 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, 
that consumers rarely file individual lawsuits or arbitration cases to 
obtain such relief, and that as a result pre-dispute arbitration 
agreements lowered incentives for financial service providers to assure 
that their conduct comported with legal requirements and interfered 
with the ability of consumers to obtain relief where violations of law 
occurred.
    Second, the proposal would have required providers that use pre-
dispute arbitration agreements to submit certain records relating to 
arbitral proceedings to the Bureau. The Bureau stated that it intended 
to use the information it would have collected to continue monitoring 
arbitral proceedings to determine whether there are developments that 
raise consumer protection concerns that would warrant further Bureau 
action. The Bureau stated that it intended 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 have applied 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. 
Consistent with the Dodd-Frank Act, the proposal would have applied 
only to agreements entered into after the end of the 180-day period 
beginning on the regulation's effective date. The Bureau proposed an 
effective date of 30 days after a final rule is published in the 
Federal Register. To facilitate implementation and ensure compliance, 
the Bureau proposed language that providers would be required to insert 
into such arbitration agreements to explain the effect of the rule. The 
proposal would have also permitted providers of general-purpose 
reloadable prepaid cards to continue selling packages that contain non-
compliant arbitration agreements, if they gave consumers a compliant 
agreement as soon as consumers register their cards and the providers 
complied with the proposal's requirement not to use arbitration 
agreements to block class actions.

E. Feedback Provided to the Bureau

    The Bureau received over 110,000 comments on the proposal during 
the comment period. These commenters included consumer advocates; 
consumer lawyers and law firms; public-interest consumer lawyers; 
national and regional industry trade associations; industry members 
including issuing banks and credit unions, and non-bank providers of 
consumer financial products and services; nonprofit research and 
advocacy organizations; members of Congress and State legislatures; 
Federal, State, local, and Tribal government entities and agencies; 
Tribal governments; academics; State attorneys general; and individual 
consumers. In addition to letters addressing particular points raised 
by the Bureau in its preliminary findings, the Bureau received tens of 
thousands of form letters and signatures on petitions from individuals 
both supporting and disapproving of the proposal. As is discussed in 
greater detail in Part VI below, many thousands of consumers submitted 
comments generally disapproving of the Bureau's proposal (many of these 
comments were form comments) while many consumers submitted comments 
generally approving of the Bureau's proposal and, in many instances, 
urging a broader rule that prohibited arbitration agreements altogether 
in contracts for consumer financial products and services (many of 
these comments were form comments or petition signatures as well).
    Since the issuance of the proposal, the Bureau has engaged in 
additional outreach. The Bureau held a field hearing to discuss the 
proposal and its potential impact on consumers and providers in 
Albuquerque, New

[[Page 33247]]

Mexico.\421\ The Bureau engaged in an in-person consultation with 
Indian Tribes in Phoenix, Arizona in August 2016 pursuant to its Policy 
for Consultation with Tribal Governments after the release of this 
notice of proposed rulemaking.\422\ In addition, the Bureau received 
input on its proposal from its Consumer Advisory Board and its Credit 
Union Advisory Council. Finally, interested parties also made ex parte 
presentations to Bureau staff, summaries of which can be found on the 
docket for this rulemaking.\423\
---------------------------------------------------------------------------

    \421\ Bureau of Consumer Fin. Prot., ``Field Hearing on 
Arbitration in Albuquerque, NM,'' (May 5, 2016), (video, transcript, 
and remarks by Director Cordray), available at https://www.consumerfinance.gov/about-us/events/archive-past-events/field-hearing-arbitration-albuquerque-nm/.
    \422\ 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.
    \423\ Regulations.gov, ``Arbitration Agreements,'' No. CFPB-
2016-0020, https://www.regulations.gov/docket?D=CFPB-2016-0020 (last 
visited June 21, 2017)
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V. Legal Authority

    As discussed more fully below, there are two components to this 
final rule: a rule prohibiting providers from the use of arbitration 
agreements to block class actions (as set forth in Sec.  1040.4(a)) and 
a rule requiring the submission to the Bureau of certain arbitral 
records and arbitration-related court records (as set forth in Sec.  
1040.4(b)). The Bureau is issuing the first component of this rule 
pursuant to its authority under section 1028(b) of the Dodd-Frank Act 
and is issuing the second component of this rule pursuant to its 
authority both under section 1028(b) and section 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 
rule relating to pre-dispute arbitration agreements fulfills all these 
statutory requirements and is in the public interest, for the 
protection of consumers, and consistent with the Bureau's Study.

B. Section 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.\424\ Accordingly, in issuing this, the Bureau 
is exercising 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).\425\
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    \424\ See Dodd-Frank section 1002(14) (defining ``Federal 
consumer financial law'' to include the provisions of title X of the 
Dodd-Frank Act).
    \425\ See Section 1022(b)(2) Analysis, infra Part VIII.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.\426\ 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, 
business conduct, markets, and activities of covered persons and 
service providers. The Bureau finalizes 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).
---------------------------------------------------------------------------

    \426\ Dodd-Frank section 1022(c)(3)(B).
---------------------------------------------------------------------------

VI. The Bureau's Findings That the Final Rule Is in the Public Interest 
and for the Protection of Consumers

    The Bureau notes that commenters on the proposal made extensive 
comments on the Bureau's preliminary findings related to Dodd-Frank Act 
Section 1028(b), including its factual findings, its findings that the 
proposal would be for the protection of consumers, and its findings 
that the proposal would be for the protection of consumers. The bulk of 
these commenters did not identify whether their comments on particular 
topics were related to the preliminary factual findings (discussed 
below in Part VI.B), to the preliminary findings that the proposed rule 
would be for the protection of consumers (discussed below in Parts 
VI.C.1 and VI.D.1), or to the preliminary findings that it would be in 
the public interest (discussed below in Parts VI.C.2 and VI.D.2). 
Accordingly, for this final rule, the Bureau addresses each comment in 
the context of the finding it believes the comment was most likely 
addressing. There is significant overlap between the topics addressed 
in the final factual findings, the findings that the rule would be for 
the protection of consumers, and the finding that the rule would be in 
the public interest. The Bureau therefore incorporates each of its 
findings into the others, to the extent that commenters may have 
intended their comments to respond to a different preliminary finding 
or to more than one.

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 Part sets forth the 
Bureau's interpretation of this standard including a summary of its 
proposed standard and a review of comments received on it.
The Bureau's Proposal
    As noted in the proposal, the Bureau can read this requirement 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 in order to determine which reading best effectuates 
the purposes of the statute, the Bureau exercises its expertise. The 
Bureau proposed to interpret the two

[[Page 33248]]

phrases as related but conceptually distinct.
    As discussed in the proposal, 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 the 
Securities Act and the Securities 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.'' \427\ The SEC has routinely applied this 
language without delineating separate tests or definitions for the two 
phrases.\428\ 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 the case 
for section 1028, since nearly every member of the public is a consumer 
of financial products and services under Dodd-Frank. Furthermore, in 
exercising its roles and responsibilities as the Consumer Financial 
Protection Bureau, the Bureau ordinarily approaches consumer protection 
holistically. In other words, the Bureau approaches consumer protection 
in accordance with the broad range of factors it generally analyzes 
under title X of Dodd-Frank, which include systemic impacts and other 
public concerns as discussed further below. Therefore, the proposal 
explained that 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 
would be informed by the Bureau's particular expertise in the 
protection of consumers.
---------------------------------------------------------------------------

    \427\ 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)(1).
    \428\ See, e.g., Bravo Enterprises Ltd., Securities Exchange Act 
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 Notice of Commission Conclusions and Rule-
Making Proposals, Securities Act Release No. 5627 [1975-1976 
Transfer Binder] Fed. Sec. L. Rep. (CCH) at 7 (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.'').
---------------------------------------------------------------------------

    But the proposal further explained that the Bureau believed that 
treating the two phrases as separate tests would ensure a fuller 
consideration of 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.\429\ Under this framework, the proposal 
explained, the Bureau would be required to exercise its expertise to 
outline a standard for each phrase because both phrases are ambiguous. 
In doing so, and as described in more detail below, the Bureau would 
look to, using its expertise, the purposes and objectives of title X to 
inform the ``public interest'' prong,\430\ and rely on its expertise in 
consumer protection to define the ``consumer protection'' prong.
---------------------------------------------------------------------------

    \429\ See Hibbs v. Winn, 542 U.S. 88, 101 (2004); Bailey v. 
United States, 516 U.S. 137, 146 (1995).
    \430\ 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).
---------------------------------------------------------------------------

    The proposal explained that under this approach the Bureau believed 
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, the proposal 
explained, 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 other relevant 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. The other relevant elements of the public interest include 
impacts on providers, markets, and the rule of law, in the form of 
accountability and transparent application of the law to providers, as 
well as other related general systemic considerations.\431\ The Bureau 
proposed to adopt this interpretation, giving the two phrases 
independent meaning.\432\
---------------------------------------------------------------------------

    \431\ 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).
    \432\ The proposal explained that the Bureau believes that 
findings sufficient to meet the two tests explained in the proposal 
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.
---------------------------------------------------------------------------

    The proposal also explained that the Bureau's proposed 
interpretations of each phrase standing alone were 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 therefore would be 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 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.'' \433\ 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

[[Page 33249]]

agencies.\434\ In light of these purposes and requirements, as set 
forth in the proposal, the Bureau understands its responsibilities with 
respect to the administration of Federal consumer financial laws to be 
integrated with the advancement of a range of other public goals such 
as fair competition, innovation, financial stability, and the rule of 
law.
---------------------------------------------------------------------------

    \433\ 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.
    \434\ Dodd-Frank section 1022(b)(2)(B) and (C).
---------------------------------------------------------------------------

    Accordingly, the Bureau proposed 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, 
as well as the impact of any change in those markets on the broader 
economy, and the promotion of the rule of law.\435\
---------------------------------------------------------------------------

    \435\ The Bureau uses its expertise to balance competing 
interests, including how much weight to assign each policy factor or 
outcome.
---------------------------------------------------------------------------

    With respect to ``the protection of consumers,'' as explained above 
and in the proposal, 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 proposed to 
interpret to include the full range of considerations encompassed in 
title X, the proposal explained that the Bureau believed, based on its 
expertise, that ``for the protection of consumers'' should not be 
interpreted in the broad manner in which it is ordinarily understood in 
the Bureau's work.
    The Bureau instead proposed to interpret the phrase ``for the 
protection of consumers'' as used in section 1028(b) 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 proposed to interpret it, would be 
exclusively on the impacts of a proposed regulation on the level of 
compliance with relevant laws, including deterring violations of those 
laws, and on consumers' ability to obtain redress or relief. 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.'' \436\ Under this proposed 
interpretation, the Bureau would not consider more general or systemic 
concerns with respect to the functioning of the markets for consumer 
financial products or services or the broader economy as part of 
section 1028's requirement that the rule be ``for the protection of 
consumers.'' \437\ Rather, the Bureau would consider these factors 
under the public interest prong.
---------------------------------------------------------------------------

    \436\ Dodd-Frank section 1021(b)(1) and (2).
    \437\ See Whitman v. Am. Trucking Ass'ns, Inc., 531 U.S. 457, 
465 (2001).
---------------------------------------------------------------------------

    The proposal stated that the Bureau provisionally believed that 
giving separate meaning and consideration to the two prongs would best 
ensure effectuation of the purpose of the statute. 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.\438\
---------------------------------------------------------------------------

    \438\ As noted above, the proposal explained that if the Bureau 
were to treat the standard as a single, unitary test, the test would 
involve the same considerations as described above, while allowing 
for a more flexible balancing of the various considerations. The 
Bureau accordingly believed that findings sufficient to meet the two 
tests explained in the proposal would also be sufficient to meet a 
unitary test, because any set of findings that met each of two 
independent criteria would necessarily meet a more flexible single 
test combining them.
---------------------------------------------------------------------------

Comments Received
    Several commenters--a nonprofit, an industry trade association, two 
industry commenters, and an individual--supported the Bureau's proposal 
to interpret the legal standard as including two separate but related 
tests. A trade association of consumer lawyers argued for treating the 
legal standard as a single test given that other similar standards have 
traditionally been treated as unitary and that the Bureau's two 
proposed tests would have significant overlap.
    One nonprofit commenter acknowledged that the phrase ``public 
interest'' is susceptible to multiple interpretations, but also stated 
that the Bureau's proposed interpretation of the legal standard 
includes factors that should not be considered. This commenter 
explained that, in its view, the Bureau should interpret the phrase in 
the context of the FAA and the longstanding Federal policy that 
encourages use of arbitration as an efficient means of resolving 
disputes. The commenter further suggested that section 1028 requires 
the Bureau to find that a regulation is in the public interest for 
reasons uniquely applicable to consumer financial products or services 
rather than for reasons that could apply to other types of products or 
services. Furthermore, this commenter contended that in enacting 
section 1028, Congress was not concerned with under-enforcement of laws 
because there is no specific reference to such considerations in that 
section of the statute or its brief legislative history. The commenter 
therefore asserted that the Bureau should not consider increased 
deterrence or enforcement in determining whether a regulation is ``in 
the public interest and for the protection of consumers.''
    Several commenters identified additional specific factors that, in 
their view, the Bureau should consider in its determination of whether 
the rule is in the public interest and for the protection of consumers. 
A group of State attorneys general and an industry commenter suggested 
that the legal standard should include the public's interest in the 
freedom of contract. The industry commenter also stated that the public 
interest standard should consider individuals' ability to choose 
whether to participate in class action litigation or to be bound by 
class action judgments. A group of State legislators argued that the 
Bureau should consider States' rights as a factor in its determination 
of whether the rule is in the public interest. The group stated that 
class waivers in arbitration clauses undermine States' ability to pass 
laws that will be privately enforced, measure the efficacy of those 
laws, or observe their development, and that the legal standard should 
account for such effects.
    A group of State attorneys general argued that the proposed 
``protection of consumers'' standard is incomplete because it is 
limited to providers' compliance with the law and consumers' ability to 
obtain relief. The commenters maintained that the Bureau should also 
consider consumers'

[[Page 33250]]

interest in a ``vibrant and flourishing financial market'' as part of 
the standard.
Response to Comments
    The Bureau is not persuaded by the nonprofit commenter that the 
standard should be treated as a single test on the ground that other 
similar standards have been treated as unitary and the Bureau's two 
proposed tests will have significant overlap. As explained in the 
proposal, the statutory standard is ambiguous, and while it is useful 
and relevant for the Bureau to consider how other similar standards 
have been applied, there are persuasive reasons, as set forth in the 
proposal, for the Bureau to adopt a different interpretation here in 
the context of section 1028.\439\ The Bureau recognizes that the two 
tests will have significant overlap, but that in and of itself is not a 
reason to adopt a unitary test. Instead, the Bureau continues to 
believe that treating the two phrases as separate tests is more 
consistent with canons of statutory construction and may ensure a 
fuller consideration of relevant factors.\440\
---------------------------------------------------------------------------

    \439\ Note that similar standards have not been exclusively 
applied as unitary. See Verizon v. FCC, 770 F.3d 961, 964 (D.C. Cir. 
2014) (``protection of consumers'' and ``public interest'' separate 
``conjunctive'' factors). And while other agencies have applied 
similar, but not identical language, as a unitary standard in some 
contexts, they have for the most part done so without discussion as 
to their reasons for doing so.
    \440\ Furthermore, the Bureau continues to believe that if it 
were to treat the standard as a single, unitary test, the test would 
involve the same considerations, while allowing for a more flexible 
balancing of the various considerations. Therefore findings 
sufficient to meet the two tests would also be sufficient to meet a 
unitary test, because any set of findings that met each of two 
independent criteria would necessarily meet a more flexible single 
test combining them.
---------------------------------------------------------------------------

    The Bureau also disagrees with the nonprofit commenter that stated 
that the proposed interpretation includes factors that should not be 
considered. With regard to the commenter's contention that section 1028 
requires the Bureau to find that a regulation is in the public interest 
for reasons uniquely applicable to consumer financial products or 
services rather than for reasons that could apply to other types of 
products or services, the Bureau notes that section 1028 contains no 
such limitation. As explained above, the proposed interpretation of the 
legal standard is guided by the Bureau's purposes and objectives as 
laid out in title X of the Dodd-Frank Act. The commenter did not 
identify a basis in the text of title X or the statute's underlying 
purposes for excluding factors derived from title X simply because they 
could apply to other products and services. In any event, the Bureau's 
findings are specific to consumer financial products and services and 
are based on an empirical study required by Congress that is specific 
to consumer financial products and services.\441\
---------------------------------------------------------------------------

    \441\ The Bureau notes that its Study and this rulemaking 
focused almost exclusively on the use of arbitration agreements on 
contracts for consumer financial products and services. Whether the 
findings of this rulemaking may apply in other markets is not 
relevant and beyond the scope of this process.
---------------------------------------------------------------------------

    Further, as noted above, the Bureau looks to the purposes and 
objectives of title X to inform the section 1028 standard, and the FAA 
is not referenced in those purposes and objectives. To the extent that 
Federal law encourages arbitration through the FAA, the Bureau notes 
that, as Congress has limited pre-dispute arbitration agreements in 
other contexts, Congress, through Section 1028, has granted the Bureau 
express authority to prohibit or otherwise limit the use of such 
agreements.\442\ Thus, rather than incorporate the FAA per se into its 
public interest analysis, the Bureau conducted a robust analysis of the 
advantages and disadvantages of pre-dispute arbitration agreements as 
currently enforced (under the FAA) in markets for consumer financial 
products and services. This included whether consumers are able to 
meaningfully pursue their rights and obtain redress or relief in light 
of pre-dispute arbitration agreements with class waivers enforceable 
under the FAA, as discussed in Section VI.B.
---------------------------------------------------------------------------

    \442\ See CompuCredit Corp. v. Greenwood, 565 U.S. 95, 103-04 
(2012) (listing statutes where Congress has ``restricted the use of 
arbitration'' as well as section 1028); see also Dodd-Frank section 
1414(a) (``No residential mortgage loan . . . may include terms 
which require arbitration . . . as the method for resolving any 
controversy or settling any claims arising out of the 
transaction.'').
---------------------------------------------------------------------------

    The Bureau also disagrees with the commenter's contention that 
increased deterrence or enforcement should not be considered because 
section 1028 and its brief legislative history \443\ do not 
specifically mention deterrence. As explained above, the Bureau looks 
to the purposes and objectives of title X to inform the ``public 
interest'' inquiry, and these statutory purposes and objectives evince 
a goal of enforcing the law and deterring illegal behavior as well as a 
mandate for the Bureau to do so.\444\ Similarly, based on its expertise 
in consumer protection, the Bureau believes that deterring illegal 
behavior and enforcing the law are core aspects of the ``protection of 
consumers.'' The absence of a specific mention of deterrence or 
enforcement in section 1028 or its legislative history does nothing to 
undercut these conclusions. In fact, the Bureau believes that while the 
phrase ``in the public interest and for the protection of consumers'' 
is ambiguous it would be unreasonable not to consider deterrence as 
part of the standard.
---------------------------------------------------------------------------

    \443\ See S. Rept. 111-176, at 171 (2010).
    \444\ See, e.g., Dodd-Frank sections 1021(a) (``The Bureau shall 
seek to implement and, where applicable, enforce Federal 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.''); 1021(b)(2) (``. 
. . consumers are protected from unfair, deceptive, or abuse acts 
and practices and from discrimination''); 1021(b)(3) (``. . . 
Federal consumer financial law is enforced consistently . . . .'').
---------------------------------------------------------------------------

    A variety of commenters identified additional factors that they 
thought should be considered in the legal standard. The Bureau notes 
that the standard already encompasses the types of considerations 
suggested by these commenters, and thus, disagrees that it should 
specifically list these factors as a part of the legal standard. As the 
Bureau explained in the proposal, it interprets the public interest 
standard to include consideration of ``benefits and costs to consumers 
and firms.'' The standard thus accounts for impacts that a rule may 
have on consumers' ``freedom of contract'' and their ability to 
determine whether or not to participate in class actions. Likewise, 
both the public interest standard and the protection of consumers 
standard account for the extent to which laws are actually enforced. 
This includes the extent to which State laws that States intend to be 
privately enforced are actually enforced in this manner.
    Finally, the Bureau also disagrees with the State attorneys general 
that suggested that the ``protection of consumers'' specifically (as 
opposed to the section 1028 standard generally or ``the public 
interest'' prong) should include consideration of a rule's impact on 
the general flourishing of the economy. As explained in the proposal, 
the Bureau generally views consumer protection holistically in its 
approach to fulfilling its mandate in accordance with the broad range 
of factors it considers under title X of Dodd-Frank. But in the context 
of section 1028, which pairs ``the protection of consumers'' with ``the 
public interest,'' the Bureau continues to believe that systemic 
impacts should be considered under the public interest standard rather 
than the protection of consumers standard. As such, the Bureau 
considers a variety of factors related to competition and the 
flourishing of the economy under the public interest

[[Page 33251]]

standard rather than the protection of consumers standard. Such 
systemic impacts implicate benefits to consumers, including consumers' 
interests in ``access to a vibrant and flourishing financial market'' 
as noted by the commenter, and the Bureau considers those benefits in 
its public interest analysis.
The Final Legal Standard
    For these reasons and those stated in the proposal, the Bureau is 
adopting the interpretation of the section 1028 standard largely as 
proposed, with minor wording changes for clarification, as restated 
below.
    The phrase ``in the public interest and for the protection of 
consumers'' in section 1028 is ambiguous. The Bureau interprets it as 
comprising two separate but related standards.
    The Bureau interprets the phrase ``in the public interest'' to 
condition any regulation under section 1028 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 requires the Bureau to consider the benefits and costs to 
consumers and firms, including the more direct factors considered under 
the protection of consumers standard, and general or systemic concerns 
with respect to the functioning of markets for consumer financial 
products or services, as well as the impact of any changes in those 
markets on the broader economy and the promotion of the rule of law, in 
the form of accountability and transparent application of the law to 
providers.\445\
---------------------------------------------------------------------------

    \445\ The Bureau uses its expertise to balance competing 
interests, including how much weight to assign each policy factor or 
outcome.
---------------------------------------------------------------------------

    The Bureau interprets the phrase ``for the protection of 
consumers'' as used in section 1028 to condition any regulation on a 
finding that such regulation will 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 is 
exclusively on the impacts of a regulation on the level of compliance 
with relevant laws, including deterring violations of those laws, and 
on consumers' ability to obtain redress or relief. Under the Bureau's 
interpretation, the Bureau does not consider more general or systemic 
concerns with respect to the functioning of the markets for consumer 
financial products or services or the broader economy as part of 
section 1028's requirement that the rule be ``for the protection of 
consumers.'' Rather, the Bureau considers these factors under the 
public interest prong.

B. The Bureau's Factual Findings Consistent With the Study and 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 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 
finds that all of the factual findings in this Part VI.B are consistent 
with the Study.
    As noted in Part IV.E, above, the Bureau received many comments on 
the class proposal. In addition to letters addressing particular points 
raised by the Bureau in its preliminary findings, the Bureau received 
tens of thousands of letters and signatures on petitions from 
individuals both supporting and disapproving of the class 
proposal.\446\
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    \446\ The Bureau received a number of letters that did not 
appear to address the proposal at all and instead expressed general 
favor or displeasure with the Bureau or the Federal government. The 
Bureau views these comments as beyond the scope of the proposed 
rule.
---------------------------------------------------------------------------

    The Bureau received letters from industry, including banks, credit 
unions, non-bank providers of consumer financial product and services, 
trade associations, academics, members of Congress, nonprofits, 
consumers, and others expressing disapproval of the Bureau's class 
proposal. The specifics of these letters are discussed in relevant part 
below. The majority of the letters criticizing the proposal expressed 
general disapproval rather than specific concerns with provisions of 
the proposed regulation. Many of these letters recited facts derived 
from the Study, such as the amount of payments received per consumer in 
class action settlements, the amount of relief received by consumers 
who obtained arbitral awards in their favor, the amount of fees paid to 
plaintiff's attorneys in class actions, and the proportion of class 
cases that do not result in classwide relief. Many of these comments 
expressed concerns that the proposal would raise the cost to consumers 
of financial services and that only plaintiff's attorneys would benefit 
from the class proposal because of the large fees that plaintiff's 
attorneys often receive when class action cases are settled. These 
urged the Bureau not to adopt the proposal.
    The Bureau also received many comments from consumers, consumer 
advocates, nonprofits, public-interest consumer lawyers, consumer 
lawyers and law firms, academics, members of Congress, State attorneys 
general, State legislators, local government representatives, and 
others that expressed broad support for the class proposal. The 
specifics of these letters are also discussed in relevant part below. 
These commenters explained that, in their view, the proposal is in the 
public interest, for the protection of consumers and, if finalized, 
would be consistent with the Study. Many of these letters recited facts 
derived from the Study and cited by the Bureau in the proposal that 
support these findings. For example, many emphasized the need for class 
actions by comparing the benefits provided to consumers in individual 
arbitration and litigation with those provided in class actions. These 
letters also stated that forcing arbitration on consumers by means of 
form contracts is not in the public interest. Many asserted that 
consumers should never have to give up constitutional protections, such 
as the right to bring a case in court. A petition signed by many 
thousands of consumers asked the Bureau to restore consumers' right to 
join together to take companies to court. Other commenters urged the 
Bureau to adopt the class proposal because it would generally enhance 
consumer rights vis-[agrave]-vis financial institutions.
1. A Comparison of the Relative Fairness and Efficiency of Individual 
Arbitration and Individual Litigation Is Inconclusive
    As explained in the proposal, the benefits and drawbacks of 
arbitration as a means of resolving consumer disputes have long been 
contested. The Bureau stated there that it did not believe that, based 
on the evidence currently available to the Bureau as of the time of the 
proposal, it could 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.\447\ Accordingly, the Bureau 
preliminarily found that a comparison of the relative fairness and 
efficiency of individual

[[Page 33252]]

arbitration and individual litigation was inconclusive and thus that a 
total ban on the use of pre-dispute arbitration agreements in consumer 
finance contracts was not warranted at that time.
---------------------------------------------------------------------------

    \447\ See Study, supra note 3, section 6 at 4 (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.
---------------------------------------------------------------------------

Comments Received
    Numerous industry, research center, and State attorneys general 
commenters disagreed with the Bureau's preliminary assessment that a 
comparison of the relative fairness and efficiency of individual 
arbitration and individual litigation is inconclusive. Instead, many of 
these commenters stated their belief that arbitration is a superior 
form of dispute resolution than individual litigation for consumers 
because it is less expensive, faster, and does not require the consumer 
to retain an attorney. For example, commenters stated that the informal 
nature of arbitration allows for a more streamlined process; that 
overburdened courts slow resolution of individual litigation; that 
arbitration hearings can be held via telephone or other convenient 
means, and that the lack of procedural complexity in arbitration 
minimizes the need for a consumer to have an attorney.\448\ These 
commenters further stated that the class rule would cause providers to 
remove arbitration agreements from their consumer contracts altogether, 
thereby depriving consumers of arbitration as a forum for hearing their 
individual disputes and forcing them to proceed in court; the Bureau's 
response to these comments is addressed below in Part VI.C.1, because 
they relate to whether the class rule protects consumers and not these 
factual findings regarding a comparison of the relative fairness and 
efficiency of individual arbitration and individual litigation.
---------------------------------------------------------------------------

    \448\ Among commenters that favored arbitration in consumer 
contracts were a number of automobile dealers and their advocates. 
In response, a consumer lawyer commenter noted that the automobile 
dealers' opinion might be hypocritical insofar as they advocate for 
including arbitration agreements in their contracts with consumers 
while advocating for their removal in dealers' contracts with 
manufacturers.
---------------------------------------------------------------------------

    A group of State attorneys general commenters, a nonprofit 
commenter, many individual commenters, and Congressional, consumer 
advocate, academic, and consumer law firm commenters also disagreed 
with the Bureau's preliminary findings about the relative fairness of 
individual arbitration and individual litigation, but for reasons 
opposite those described above. Instead, these commenters stated that 
individual arbitration was so unfair relative to individual litigation 
that the Bureau should have protected individual consumers by banning 
outright the use of pre-dispute arbitration agreements. For example, 
several consumer advocate commenters and many individual commenters 
(including thousands of individuals who had signed petitions) argued 
that any arbitration proceeding that occurs pursuant to a pre-dispute 
arbitration agreement is ``forced'' and therefore unfair, and that 
arbitration agreements are contracts of adhesion that should not be 
permitted in any context. Other commenters argued that consumer 
arbitration cannot be neutral because it naturally favors repeat 
players--the providers who repeatedly hire arbitrators and select 
administrators--over consumers, who may only be involved in an 
arbitration once. One public-interest consumer lawyer commenter argued 
that only a complete ban on pre-dispute arbitration agreements would 
help consumers because consumers cannot find legal representation for 
arbitrations and few consumers file arbitrations in any case. Academic 
commenters stated that consumers should never be deprived of the right 
to go to court. A Congressional commenter noted that arbitral filing 
fees can be tens of thousands of dollars and thus are unaffordable to 
many consumers, particularly when compared to filing fees in court 
which vary but in some courts are as low as a few hundred dollars. 
Finally, another public-interest consumer lawyer commenter observed 
that many resources exist to help individual litigants use the court 
system--such as volunteer attorneys, offices that offer legal advice, 
publications, standardized pro se forms, videos, etc.--but that 
comparable resources do not exist to help individuals navigate 
arbitration proceedings.
Response to Comments and Findings
    As noted in the proposal and explained in the Study, 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. Commenters did not disagree with this preliminary 
finding. The Study showed that AAA arbitrations proceeded relatively 
expeditiously relative to litigation, that companies often advance 
consumer filing fees in arbitration, which does not occur in 
litigation, and that at least some consumers proceeded without an 
attorney. The Study also showed that those consumers who did prevail in 
arbitration obtained substantial individual awards--the average 
recovery by the 32 consumers who won judgments on their affirmative 
claims was nearly $5,400.\449\
---------------------------------------------------------------------------

    \449\ See Study, supra note 3, section 5 at 13.
---------------------------------------------------------------------------

    At the same time, the Study showed that a large percentage of the 
relatively small number of AAA individual arbitration cases were 
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 prevailed more 
frequently on their claims than consumers \450\ and that companies were 
almost always represented by attorneys (90 percent of the claims 
analyzed) while consumers were represented significantly less (60 
percent).\451\ Finally, the Study showed that companies were awarded 
payment of their attorney's fees by consumers in 14.1 percent of 341 
disputes resolved by arbitrators in companies favor' and consumers were 
awarded payment of their attorney's fees in 14.6 percent of the 341 
disputes in which consumers prevailed and were represented by an 
attorney.\452\
---------------------------------------------------------------------------

    \450\ Id. section 5 at 13-14 (finding that consumers prevailed 
on 25 of 92 claims in which a consumer asserted affirmative claims 
only and an arbitrator reached a decision on the merits in seven of 
69 claims in which a consumer brought an affirmative claim and also 
disputed debts they were alleged to owe (finding that companies 
prevailed in 227 out of 250 cases in which companies asserted 
counterclaims against consumers). The Study did not explain why 
companies prevailed more often than consumers. While some 
stakeholders have suggested that arbitrators are biased--citing, for 
example, that companies were repeat players or often the party 
effectively chose the arbitrator--other stakeholders and research 
suggested that companies prevailed more often than consumers because 
of a difference in the relative merits of such cases.
    \451\ Id. section 5 at 29.
    \452\ Id. section 5 at 12. Note that the number of attorney's 
fee requests was not recorded.
---------------------------------------------------------------------------

    In light of these results and in consideration of the comments 
received, the Bureau continues to believe that the results of the Study 
were inconclusive as to the benefits to consumers of individual 
arbitration versus individual litigation during the Study period. 
Nevertheless, because arbitration procedures are privately determined, 
the Bureau finds that they can under certain circumstances pose risks 
to consumers. For example, as discussed above in Part II.C and in the 
proposal, until it was effectively shut down by the Minnesota Attorney 
General, the National Arbitration Forum (NAF) was the predominant 
administrator for certain types of arbitrations. NAF stopped conducting 
consumer arbitrations in response to allegations that its ownership 
structure gave rise to an institutional conflict of interest. The

[[Page 33253]]

Study also showed isolated instances of arbitration agreements 
containing provisions that, on their face, raised significant concerns 
about fairness to consumers similar to those raised by NAF, such as an 
agreement that designated a Tribal administrator that does not appear 
to exist and agreements that specified NAF as a provider even though 
NAF no longer handled consumer finance arbitration, making it difficult 
for consumers to resolve their claims.\453\
---------------------------------------------------------------------------

    \453\ Id. section 2 at 37 tbl. 4. 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'').
---------------------------------------------------------------------------

    As first stated in the proposal, the Bureau remains concerned about 
the potential for consumer harm in the use of arbitration agreements in 
the resolution of individual disputes. 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 Bureau is therefore, as set out 
below at length in Part VI.D and the section-by-section analysis of 
section 1040.4(b), adopting a system that will allow it and the public, 
to review certain arbitration materials in order to monitor the 
fairness of such proceedings over time.
    However, the Bureau disagrees with the consumer advocate and 
individual commenters that any arbitration proceeding pursuant to a 
pre-dispute arbitration agreement is necessarily ``forced'' and unfair, 
and that arbitration is not neutral. The Bureau recognizes that, with 
rare exception, contracts for consumer financial services are contracts 
of adhesion offered on a take-it-or-leave-it basis. In some markets, 
consumers may, in theory, be able to choose a provider that does not 
require pre-dispute arbitration but the Study found that credit card 
consumers generally do not understand the consequences of entering into 
a pre-dispute agreement or shop on that basis and the Bureau has no 
reason to believe that consumers in other markets are any 
different.\454\ Furthermore, the Study found that there are markets for 
certain consumer financial services where pre-dispute arbitration 
agreements are nearly ubiquitous; consumers in those markets have 
little choice.\455\ Thus, the Bureau generally agrees that consumers 
rarely affirmatively and knowingly elect to enter into pre-dispute 
arbitration agreements.
---------------------------------------------------------------------------

    \454\ See generally Study, supra note 3, section 3.
    \455\ See generally id. section 2.
---------------------------------------------------------------------------

    Nonetheless, the Bureau does not agree that the fact that consumers 
are largely unaware of these agreements means that the resulting 
arbitration proceedings are inherently unfair. As is discussed above, 
the Bureau finds that the Study did not provide any basis for 
evaluating whether individual arbitration proceedings resulted in 
demonstrably worse outcomes than individual litigation proceedings in a 
manner that warrants a more substantial intervention. The Bureau also 
disagrees with the comment that the Study identified a clear-cut 
repeat-player effect favoring of industry participants over consumer 
participants. As noted above, the Study showed that arbitration cases 
proceeded relatively expeditiously relative to individual litigation 
because companies often advance filing fees, the cost to consumers of 
arbitral filing fees was modest relative to individual litigation and 
at least some consumers proceeded without an attorney. The Study also 
showed that those 32 consumers who did prevail in arbitration obtained 
substantial individual awards.\456\ For all of these reasons, the 
Bureau disagrees, at this time, with those commenters that recommended 
that it should completely ban the use of pre-dispute arbitration 
agreements.
---------------------------------------------------------------------------

    \456\ Id. section 5 at 13-15.
---------------------------------------------------------------------------

    The Bureau acknowledges that an arbitration agreement, by 
definition, deprives consumers of the right to bring disputes to court 
since an arbitration agreement permits a company to force any dispute 
it does not wish to litigate in court to an arbitral forum. On the 
other hand, an arbitration agreement gives consumers a new right--the 
right to force a company to resolve a dispute in arbitration. Absent 
such an agreement, consumers could proceed to arbitration only if the 
company is willing to arbitrate a particular dispute. Given the 
inconclusive nature of the evidence concerning the relative fairness or 
efficacy of individual litigation and arbitration in resolving consumer 
disputes, the Bureau is not prepared at this time to ban arbitration 
agreements.
2. 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 concluded in the proposal, 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 product or service contracts are enforced.
    The Study showed that consumers rarely pursued individual claims 
against companies they dealt with 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.\457\ Second, the Study 
showed that relatively few consumers filed claims against companies in 
small claims courts even though most arbitration agreements contained 
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 87 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 United States.\458\ Extrapolating those results to 
the population of the United States suggests that, at most, a few 
thousand cases are filed per year in small claims court by consumers 
concerning consumer financial products or services.\459\
---------------------------------------------------------------------------

    \457\ Id. section 6 at 28 tbl. 6.
    \458\ The figure of 870 claims included 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 id. appendix Q at 113-114.
    \459\ As explained in the Study and above at Part III.D.5, other 
than its sample of filings in small claims court, the Bureau did not 
collect individual claims filed in State courts of general 
jurisdiction because doing so was infeasible. Id. appendix L at 71.

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[[Page 33254]]

    As discussed in the proposal's preliminary findings, a similarly 
small number of consumers filed consumer financial claims in 
arbitration. The Study showed 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.\460\ Given 
that the AAA was the predominant administrator identified in the 
arbitration agreements studied, the Bureau believes that this 
represents most consumer finance arbitration disputes that were filed 
during the Study period. Indeed, as noted in the proposal, JAMS (the 
second largest provider of consumer finance arbitration) reported to 
Bureau staff that it handled about 115 consumer finance arbitrations in 
2015.\461\
---------------------------------------------------------------------------

    \460\ See id. appendix Q at 113-114 and section 5 at 19-20. 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 tbl. 6. 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. section 5 at 
21-22 tbl. 2. 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. section 5 at 31 n.64. Another 175 were 
mutually filed by consumers and companies. Id. section 5 at 19.
    \461\ Id. section 4 at 2; 81 FR 32830, 32836 n.97 (May 24, 
2016).
---------------------------------------------------------------------------

    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 was 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.\462\ As stated in the proposal's preliminary findings, the 
Bureau believes that the relatively low numbers of formal individual 
claims (either in judicial or arbitral fora) 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 who understands the 
relevant laws and whether to pursue facts unknown to the consumer that 
may support a claim. 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.\463\ Individual dispute resolution therefore generally 
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.
---------------------------------------------------------------------------

    \462\ 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 3, section 8 at 40 and 41-42 tbl. 17.
    \463\ 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 preliminarily concluded 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.\464\ 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.'' \465\ 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 an attorney. 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.'' \466\ Indeed, the Supreme 
Court has explained that:
---------------------------------------------------------------------------

    \464\ 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), 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.
    \465\ Carnegie v. Household Int'l, Inc., 376 F.3d 656, 661 (7th 
Cir. 2004).
    \466\ 28 U.S.C. App. 161 (1966).

[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.\467\
---------------------------------------------------------------------------

    \467\ 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 reflected 
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.\468\
---------------------------------------------------------------------------

    \468\ 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 
3, section 3 at 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 was not 
worth their time and expense given the small amounts at issue and 
their low likelihood of recovery.
---------------------------------------------------------------------------

    As stated in the proposal, 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.\469\ A 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--

[[Page 33255]]

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.\470\
---------------------------------------------------------------------------

    \469\ For instance, in the Study's analysis of individual 
arbitrations, the average and median recoveries by consumers who won 
awards on their affirmative claims were $5,505 and $2,578, 
respectively. Id. 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 
fee 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.
    \470\ 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 found that the 
relatively small number of arbitration, small claims, and individual 
Federal court cases reflects the insufficiency of individual dispute 
resolution mechanisms alone to enforce effectively the relevant laws, 
including the Federal consumer financial laws and consumer finance 
contracts, for all consumers of a particular provider.
    As discussed in the proposal, some stakeholders claimed that the 
low total volume of individual claims found by the Study in litigation 
or arbitration was attributable not to inherent deficiencies in the 
individual formal dispute resolution systems but rather to the success 
of informal dispute resolution mechanisms in resolving consumers' 
complaints. Under 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 preliminarily explained why 
it did not find this argument persuasive. As stated in the proposal, 
the Bureau preliminarily found that informal dispute resolution was not 
sufficient because--as with pursuing claims through more formal 
mechanisms--consumers may not know that their provider is acting in a 
way that harms them or that violates the law. Moreover, even when 
consumers recognize problematic behavior and decide to complain to 
their providers informally, companies exercise their discretion about 
whether they provide relief to particular consumers. The Bureau pointed 
out, for example, that a company could decide whether to provide relief 
to a consumer based on the customer's profitability, rather than based 
on the merit of the complaint. And in the Bureau's experience, even if 
companies resolve some disputes in favor of customers who complain, 
companies do not generally volunteer to provide relief to other 
affected customers who do not themselves complain.
Comments Received
    Number of individual claims. Numerous industry, research center, 
and State attorneys general commenters challenged the Bureau's 
preliminary finding that consumers rarely pursued individual claims 
against their providers of consumer financial products or services. To 
the extent these comments relate primarily to the Study's data 
regarding this preliminary finding, they are summarized above in Part 
III.D. Various consumer advocate, public-interest consumer lawyers, 
nonprofit, and consumer lawyer commenters agreed with the Bureau's 
preliminary finding that consumers rarely pursued individual claims 
against providers of consumer financial products or services with whom 
they dealt. These commenters generally cited to the Bureau's Study and 
how it confirmed their own experiences concerning the relative rarity 
of individual cases across both arbitration and litigation. For 
example, a consumer advocate commenter highlighted data from the Study 
that indicated that borrowers of payday loans are particularly unlikely 
to pursue individual claims despite what the commenter asserted was 
evidence of broad misconduct by payday lenders. A law professor noted 
that there are also low numbers of consumer arbitrations in the 
cellular telephone industry, noting that one large company averaged 
less than 30 arbitrations a year despite having over 85 million 
customers.\471\ An industry commenter asserted that the Bureau has no 
data on individual lawsuits filed in State court and, therefore, the 
Bureau has no basis for finding that consumers rarely file individual 
lawsuits.
---------------------------------------------------------------------------

    \471\ A recent media report similarly found, regarding a 
different cellular telephone company, ``that--out of nearly 150 
million customers--only 18 went through arbitration for small claims 
in the past two years.'' CBS Evening News, ``AT&T and DirecTV Face 
Thousands of Complaints Linked to Overcharging Promotions,'' (May 
16, 2017), available at http://www.cbsnews.com/news/complaints-att-directv-bundled-services-directv-customers-promotions-overcharging/.
---------------------------------------------------------------------------

    Explanations for low number of individual claims. Few industry 
commenters addressed the Bureau's preliminary finding that consumers 
often are not aware that they are injured or do not fully understand 
their potential claims without legal advice. However, many industry, 
State attorneys general, and research center commenters disputed the 
relevance of the Study's consumer survey, which found that only 2 
percent of respondents were likely to seek an attorney or file formal 
claims if they found an unexplained fee on their credit card bill.
    On the other hand, numerous consumer advocate, public-interest 
consumer lawyer, and consumer lawyer and law firm commenters validated 
the Bureau's preliminary finding in this regard. Among the reasons 
given, one consumer advocate explained that consumers often do not know 
they are injured in the first place given the complexity of consumer 
finance products and the Federal and State laws and regulations 
governing those products. Similarly, a consumer law firm explained that 
their clients were often unaware of claims that they might be able to 
bring. Even when they are harmed, the commenter stated that consumers 
may not know that they may be entitled to a remedy, particularly when 
statutory damages are available. For example, a consumer may be 
frustrated by telephone calls from a debt collector but not know that 
the calls violate the Telephone Consumer Protection Act and that he or 
she is entitled to statutory damages. On the other hand, some industry 
commenters suggested that there are few individual consumer finance 
claims because public enforcement sufficiently remedies all violations 
of consumer finance laws.\472\
---------------------------------------------------------------------------

    \472\ For example, commenters cited enforcement activities by 
the Bureau and State attorneys general.
---------------------------------------------------------------------------

    With respect to the Bureau's preliminary findings that consumers 
may not pursue individual claims because they are small, at least one 
industry commenter and one research center commenter agreed with the 
Bureau that consumer finance claims are often for small amounts and 
that it would not be rational for a consumer to pursue a very small 
claim, such as one for less than $200. Consumer advocates and other 
nonprofits commenters similarly agreed. However, other industry and 
research center commenters disagreed, asserting that consumer finance 
claims under laws

[[Page 33256]]

that provide for statutory damages (sometimes as much as $1,000 or 
$1,500 per violation) or double or treble actual damages are not small. 
In one industry commenter's view, when consumers can receive statutory 
damages or double or treble damages, these damages create sufficient 
incentives for consumers to bring such claims. The commenter also 
suggested there may be some particular barrier to bringing small 
consumer finance claims in arbitration as compared to other types of 
small claims, because other types of small claims are more commonly 
filed in arbitration based on publicly available data. This commenter 
noted that claims under $1,000 amounted to approximately 2 percent of 
the consumer finance arbitrations in the Study, but that small claims 
generally amounted to 3.5 percent of all AAA consumer arbitrations (not 
limited to consumer finance) between 2009 and 2014. Another industry 
commenter asserted that consumers are particularly incentivized in 
California to pursue individual remedies because of the availability of 
rescission, restitution, injunctive relief, actual damages and 
attorney's fees under many California consumer protection statutes.
    Numerous consumer advocate, individual consumer, consumer 
protection clinic law professors, academic, nonprofit, public-interest 
consumer lawyer, and consumer lawyer and law firm commenters agreed 
with the Bureau's preliminary finding that consumers do not pursue 
individual claims for many reasons, including their relative size and 
the difficulties inherent in bringing such claims on an individual 
basis. In support of the Bureau's findings in this regard, many 
consumer lawyers, individual consumers, and public-interest consumer 
lawyer commenters cited to specific examples from their own experiences 
with clients who were unable to pursue claims against providers of 
consumer financial products and services because of lack of time 
relative to the potential size of the claim. Similarly, a group of 
academic commenters concluded, based on their experience and expertise, 
that individual arbitrations are not and realistically never will be a 
sufficient substitute for consumer class actions because individual 
claims are worth small amounts of money and it is not worth consumers' 
time (or an attorney's time) to pursue them. In these commenters' view, 
even when consumers are motivated to do so it is hard to find legal 
representation, and individual consumers are often unaware of the claim 
in any event.
    The same group of academic commenters further cited to a study 
looking at a broader array of consumer arbitration claims that found 
less than 4 percent of the claims were brought for $1,000 or less, 
which in their view confirms that consumers rarely bring small claims 
in arbitration.\473\ A consumer lawyer noted that circumstances in 
consumers' lives can make bringing a claim difficult. This commenter 
explained that, in his view, consumers are busy working and providing 
for their families. Even assuming that arbitration is a streamlined 
process as compared to litigation in court, it can still involve time 
in drafting and filing a claim, researching and gathering documents, 
and other activities. In this commenter's opinion, lower-income people 
are less likely to make such an investment of time and resources.
---------------------------------------------------------------------------

    \473\ See David Horton & Andrea Cann Chandrasekher, ``After the 
Revolution: An Empirical Study of Consumer Arbitration,'' 104 Geo. 
L. J. 57, at 117 (2015).
---------------------------------------------------------------------------

    An organization of public-interest lawyers also commented that in 
its experience, low-income consumers often have claims of no more than 
a few hundred dollars. While that money may be critical for low-income 
consumers, they are unable to invest the time and money necessary to 
pursue an uncertain recovery (e.g., taking time off of work, finding 
child care, etc.). A public-interest consumer lawyer relatedly 
commented that arbitration rules (citing AAA's 44-page consumer rules 
document) are incomprehensible to the average consumer. Similarly, a 
nonprofit commenter representing servicemembers commented that 
servicemembers and their families might find it particularly difficult 
to pursue individual claims against providers due to deployment, 
frequent moves, and other logistical challenges.
    One consumer advocate commenter noted that the threat of extensive 
litigation prior to receiving a hearing on the merits of a claim 
discourages legitimate claims. This same commenter also noted that 
filing fees could discourage some claims. Relatedly, a consumer law 
firm commenter stated that, in its view, most consumers find the 
prospect of litigating (in small claims court or arbitration) pro se 
against a well-represented corporate entity to be far too intimidating 
and risky to be considered a legitimate avenue.\474\ This commenter 
cited the small number of claims documented by the Bureau in the Study 
as evidence of these dynamics. A law professor commenter stated that, 
in her opinion, consumers rarely use arbitration because of the minimal 
oversight of arbitration's fairness and lawfulness, the failure to 
require a comprehensive system of fee waivers, and the limited access 
accorded third parties.
---------------------------------------------------------------------------

    \474\ An industry commenter made a similar point, but limited it 
to pro se representation in court. A consumer law firm commenter 
disagreed that court is harder for pro se litigants. It asserted 
that arbitration rules are complex for pro se litigants, that courts 
are more accustomed to working with those who proceed pro se and 
that more resources are available for these litigants in court.
---------------------------------------------------------------------------

    One public-interest consumer law firm commenter explained that, in 
its experience, it is hard to bring claims of fraud, unfair, or 
deceptive practices in individual consumer financial services cases 
because the value of such claims is small. A consumer law firm 
commenter stated that, in its experience, individual actions are 
inefficient because damages can be low or hard to quantify and that 
these challenges impact consumers' and attorneys' risk-reward calculus. 
Another consumer lawyer commented that the laws underlying consumer 
finance are complicated and often impenetrable to laypersons. As an 
example, this commenter cited to complicated judicial interpretations 
of New York's usury law that are based on precedents over one hundred 
years old.\475\ A consumer advocate commenter explained that, in its 
opinion, consumers will take lower settlements when they do not have an 
attorney or if they fear not getting a fair decision from an arbitrator 
due to the arbitrator's potential bias.
---------------------------------------------------------------------------

    \475\ See, e.g., Ford Motor Credit Co. LLC v. Black, 910 
N.Y.S.2d 404 (N.Y. Civ. Ct. Apr. 14, 2010) (noting the long, complex 
history of New York's usury law). The commenter noted that the Third 
Circuit made a similar observation. Homa v. American Express Co., 
494 Fed Appx 191 (3d Cir. 2012) (``Furthermore, in view of the 
complexity of the issues pertaining to the merits of [the 
plaintiff's] claim, it would be very difficult for him to prosecute 
the case without the aid of an attorney whether in a judicial 
proceeding or in arbitration.'').
---------------------------------------------------------------------------

    A nonprofit commenter provided the Bureau with data from its own 
survey of consumers that found that most consumers know it is not 
practical to take legal action when the harm against them is relatively 
small.\476\ A different nonprofit commenter suggested that the

[[Page 33257]]

reason the Bureau's Study showed that most individual claims that reach 
a judgment in arbitration were of relatively high value was that these 
were the only cases most consumers wanted to pursue. A consumer 
advocate commenter agreed that individuals are likely to pursue only 
relatively high-dollar claims. On the other hand, a comment letter from 
a group of academics noted that while consumers may be discouraged from 
pursuing claims on an individual basis, consumers are motivated to 
pursue actions that can protect other consumers from being similarly 
injured; put another way, they are emboldened to pursue actions that 
will force providers to change their conduct.
---------------------------------------------------------------------------

    \476\ Pew Charitable Trusts, ``Consumers Want the Right to 
Resolve Bank Disputes in Court: An Update to the Arbitration 
Findings in 2015 Checks and Balances,'' (Aug. 17, 2016), available 
at http://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2016/08/consumers-want-the-right-to-resolve-bank-disputes-in-court. 
An industry commenter noted that the Bureau should not conclude that 
this survey supports a finding that consumers prefer court to 
arbitration because survey participants were not asked about 
arbitration. This commenter also noted that only 23 percent of 
respondents would take legal action.
---------------------------------------------------------------------------

    With respect to the Bureau's preliminary finding that it is 
difficult for consumers to find attorneys to file small claims, few 
commenters disagreed. However, an industry commenter and a research 
center commenter stated their belief that consumers should be able to 
find attorneys for small claims asserting violations of statutes that 
provide for recovery of attorney's fees. On the other hand, several 
industry, consumer advocate, public-interest consumer lawyer, and 
consumer lawyer and law firm commenters agreed with the Bureau's 
preliminary findings that it is difficult for consumers to find 
attorneys for small individual claims. One industry commenter cited a 
study that showed that attorneys are unlikely to accept contingency fee 
cases for claims below $60,000.\477\ The consumer lawyer and law firm 
commenters stated that only in rare cases did they find it economically 
sensible to bring individual small dollar claims regardless of the 
availability of statutory attorney's fees or contingent recoveries. For 
example, several public-interest consumer lawyer commenters explained 
that they lacked resources to handle all of the small-dollar claims 
that are brought to them by consumers on an individual basis and that, 
as a result, these consumers frequently abandoned these claims because 
they could not find other legal help. These commenters also noted that 
a typical attorney's hourly rate--were a consumer to decide on a fee-
based arrangement with an attorney--would quickly eclipse the value of 
any such claim. In addition, even when attorney's fees are available 
under a statute (e.g., ECOA and TILA \478\), commenters asserted that 
the uncertainty behind any legal claim and the ability to actually 
recover fees made both consumers and attorneys unwilling, in most 
cases, to bear that risk. A consumer lawyer discussed a particular case 
that the court sent to arbitration on an individual basis after it had 
been originally filed as a class action. The lawyer explained that it 
quickly became apparent that the client would not recover a fraction of 
the amount necessary to cover the time the lawyer had invested in the 
case by proceeding individually in arbitration, and the case was thus 
abandoned. Another public-interest consumer lawyer commenter suggested 
that, based on its experience, there are not enough legal services 
programs or private attorneys to pursue individually the claims of all 
victims.
---------------------------------------------------------------------------

    \477\ Elizabeth Hill, ``Due Process at Low Cost: An Empirical 
Study of Employment Arbitration Under the Auspices of the American 
Arbitration Association,'' 18 Ohio St. J. on Disp. Resol. 777, at 
783 (2003).
    \478\ ECOA, 15 U.S.C. 1691e(d); TILA, 15 U.S.C. 1640(a)(3).
---------------------------------------------------------------------------

    Consumer attitudes regarding arbitration. Industry, research 
center, and government commenters suggested alternative reasons for why 
the Bureau found relatively few individual arbitration claims. Instead 
of the Bureau's explanations, these commenters stated that consumers 
are either unaware of arbitration or do not understand it which 
discourages them from bringing individual claims, and that such factors 
could be mitigated either by the Bureau or by the market. For example, 
one industry commenter suggested that consumers would file more claims 
in arbitration if they were more educated about the benefits of 
arbitration or if arbitration agreements were required to include 
consumer-friendly provisions, such as no-cost filing or ``bonuses'' for 
consumers who win claims in certain circumstances.\479\ Another 
industry commenter suggested that consumers might not use arbitration 
because it is relatively new to consumer finance and that consumers may 
not yet know about how it can help them achieve relief for their 
claims. This commenter, who appeared to acknowledge that the number of 
consumers using arbitration is quite low, predicted that consumers 
would become more accustomed to using arbitration to resolve disputes 
given time. This same commenter suggested that the opponents of 
arbitration and the Bureau itself have helped create a negative public 
perception of arbitration that has discouraged consumers from pursuing 
it.
---------------------------------------------------------------------------

    \479\ An example ``bonus'' provision included in an arbitration 
agreement would require a company to pay a consumer double or triple 
the company's highest settlement offer if the consumer wins on his 
or her arbitration claim in an amount that exceeds that settlement 
offer.
---------------------------------------------------------------------------

    Informal dispute resolution. Many industry and research center 
commenters and a group of State attorneys general commenters suggested 
that there were relatively few individual claims because consumer harms 
were sufficiently remedied through informal dispute resolution. In so 
doing, these commenters disagreed with the Bureau's preliminary finding 
that informal dispute resolution is not sufficient to enforce the 
relevant laws, pointing to evidence in some court cases that large 
numbers of consumer complaints are resolved by informal dispute 
resolution. Some credit union commenters stated that there were 
particularly strong informal dispute resolution procedures in that 
market. One such commenter contended that the Study was flawed in 
failing to analyze informal resolution of disputes between companies 
and consumers. This commenter stated that the evidentiary record in 
AT&T v. Concepcion established that AT&T had awarded more than $1.3 
billion to consumers in informal relief during a 12-month period. The 
same industry commenter noted that the Bureau's consumer complaint 
process facilitates informal resolution of consumer claims; the 
commenter emphasized in particular that over four years of the 
existence of the process, consumers had submitted more than 500,000 
complaints and consumers had not disputed the company's response in 
more than two-thirds of the cases in which companies filed such a 
response.\480\ One research center commenter asserted that in the 
Overdraft MDL case at least $15 million was refunded to consumers 
through informal dispute resolution, supporting the claim that 
consumers received significant relief from that process.
---------------------------------------------------------------------------

    \480\ Consumer Response Annual Report, supra note 464, at 46-47 
(stating that 65 percent of consumers ``did not dispute the response 
during the feedback period'' and another 14 percent were pending 
review of the company response).
---------------------------------------------------------------------------

    This research center commenter also cited studies showing that 
companies do provide informal relief to some consumers who complain. 
For example, the commenter cited a 2014 survey of 983 credit card 
users, in which 86 percent of consumers who asked their credit card 
company to reverse a late fee were successful and further asserted that 
success is likely not correlated to socioeconomic status because 
unemployed customers had about the same rate of success as those who 
were employed.\481\ That commenter cited

[[Page 33258]]

another study--referenced by the Bureau in the proposal--showing that 
almost two-thirds of consumer complaints to a mid-sized regional bank 
in Texas were voluntarily resolved in favor of the customer in the form 
of a full refund.\482\ The commenter stated that that study further 
showed that the number of consumers who received full refunds varied 
based on the city in which the consumer lived or the type of complaint 
the consumer raised, but ranged from 56 percent to 94 percent.\483\ 
Other commenters asserted that consumers can close their accounts and 
move to new financial service providers if they do not like how their 
providers handle informal disputes. Relatedly, an industry commenter 
asserted that the Bureau had overlooked complaints that consumers file 
with State attorneys general or other State agencies.
---------------------------------------------------------------------------

    \481\ Keri Anne Renzulli, ``The Crazy Easy Trick to Getting a 
Credit Card Fee Waived or Your Rate Lowered,'' Money (Sept. 25, 
2014), available at http://time.com/money/3425668/how-to-get-credit-card-fee-waived-rate-lowered/. The Study did not appear to examine 
whether the disputed fees were in fact improper.
    \482\ Jason S. Johnston & Todd Zywicki, ``Arbitration Study: A 
Summary and Critique,'' at 31 (Mercatus Ctr. at Geo. Mason U., 
Working Paper, 2015).
    \483\ Id.
---------------------------------------------------------------------------

    In contrast, many commenters agreed with the Bureau's preliminary 
findings as to the role of informal dispute resolution. A consumer 
advocate and a public-interest consumer lawyer commenter both explained 
that low-income consumers are significantly less likely to raise 
concerns directly with a company because they have limited time, 
resources, or confidence in their rights. Relatedly, a public-interest 
consumer lawyer commenter stated that it is much easier for low-income 
consumers to access justice through the courts than it is arbitration 
because arbitration lacks many of the procedural safeguards available 
in court. A different public-interest consumer lawyer commenter 
asserted that profitability models impact companies' treatment of 
consumers and thus low-income consumers who may be less profitable are 
less likely to be treated favorably.
    Like the public-interest consumer lawyer commenter referred to 
above, a consumer law firm commenter agreed with the Bureau's 
preliminary finding that consumers may experience varied amounts of 
success through informal dispute resolution even when similarly 
situated. This commenter suggested that a particular consumer's 
sophistication, language skills, socioeconomic status, and tenacity all 
play important roles in determining whether the company will remedy the 
problem. Several commenters suggested that low-income consumers 
particularly benefit from class actions because these consumers are 
less likely than others to pursue relief individually. According to one 
consumer advocate, limited time, resources, or confidence may explain 
why low-income consumers are substantially less likely to advocate for 
their interests by complaining informally to a company or by pursuing 
formal relief. A public-interest consumer lawyer commenter suggested 
that low-income and vulnerable consumers may not realize that they have 
been the victim of unlawful predatory practices. Thus, the commenter 
asserted, class actions represent the only reasonable, private means 
for such consumers to obtain relief. Two commenters suggested that the 
specific characteristics of consumer financial services class action 
settlements make them favorably structured to provide consumers with 
meaningful relief. For example, one of these commenters noted that 
damages usually can be calculated with precision (e.g., if based on an 
improperly charged fee) and that classes are often readily 
ascertainable because providers typically have accurate records of 
their customers.\484\
---------------------------------------------------------------------------

    \484\ To support these claims, this commenter cited a paper that 
says that in consumer financial services cases, most consumers were 
compensated. Brian T. Fitzpatrick & Robert C. Gilbert, ``An 
Empirical Look at Compensation in Consumer Class Actions,'' 11 
N.Y.U. J. of L. & Bus. 767, at 788 (2011).
---------------------------------------------------------------------------

    With respect to the Bureau's preliminary finding that informal 
dispute resolution is not sufficient because a company can choose to 
respond (or not) to any consumer complaint, industry, research center, 
and a group of State attorneys general commenters asserted that 
companies with arbitration agreements have stronger incentives to 
provide relief to consumers who complain. For example, an industry and 
a research center commenter both asserted that companies have strong 
incentives to resolve complaints informally because companies' 
arbitration agreements typically require them to pay all of the filing 
fees for arbitration, which can be as high as $1,500, plus all 
expenses, and that this is a feature unique to arbitration. Therefore, 
these commenters contended that companies would rationally settle any 
claim raised by a consumer that was under $5,000, which the commenters 
asserted is the approximate cost to the company of any single 
arbitration. These commenters further noted that there is even greater 
incentive for companies to resolve claims informally when the 
arbitration agreements include ``bonus provisions'' requiring companies 
to pay consumers double or triple the company's highest settlement 
offer if the consumer wins on his or her arbitration claim in an amount 
that exceeds that settlement offer.
    At least one research center commenter agreed with the Bureau's 
assertion that a consumer's profitability could factor into the 
provider's decision on how to resolve a dispute with that consumer, 
citing data that credit scores can influence whether providers decide 
to waive fees for particular consumers while also asserting that the 
Bureau cited faulty or incomplete data to support the theory that 
providers decide how to handle complaints based on consumer 
profitability.\485\ This commenter contended, however, that 
profitability would be an appropriate standard for a provider to use in 
determining whether to resolve a dispute with a consumer because it is 
in the interest of consumers for the provider to keep only profitable 
customers. To the extent that providers retain unprofitable customers, 
the commenter asserted that fees become higher for all customers.
---------------------------------------------------------------------------

    \485\ The commenter further asserted that an article that the 
Bureau relied upon in its preliminary finding in this regard was an 
editorial. See 81 FR 32830, 32857 n.370 (May 24, 2016) (citation 
omitted).
---------------------------------------------------------------------------

    Other industry commenters and a research center commenter stated 
that there is sufficient incentive for providers to change general 
practices in response to informal complaints because it is time-
consuming for providers to respond to complaints one by one, and thus 
they would prefer to change their practices wholesale with respect to 
all consumers for the sake of efficiency. For this reason, these 
commenters disagreed with the Bureau's assertion that companies are 
unlikely to globally change practices for all consumers when only a 
fraction of consumers complain. Offering a different opinion, a 
consumer law firm commenter stated that, in its experience, only hard-
fought litigation can get a company to change its underlying practices; 
piecemeal, informal, individual complaints are too small and too easily 
ignored by most companies.
    Additionally, several commenters, including industry, research 
center, and State attorneys general commenters, contended that 
consumers do not file formal individual claims because they prefer 
instead to move their business to other companies. The State attorneys 
general commenters and an industry commenter cited data from the 
Bureau's consumer survey that they contend shows a small number of 
consumers

[[Page 33259]]

would pursue a legal remedy as opposed to a market-based one. Thus, to 
keep customers happy, companies maintain positive policies and comply 
with the law regardless of the availability of private enforcement. 
Similarly, a few industry commenters suggested that there was no need 
for consumers to file claims in arbitration or litigation or to pursue 
informal dispute resolution because consumers can use social media to 
address business practices that consumers believe to harm them. In one 
commenter's view, a consumer's social media complaint about their 
provider can quickly attract support from many other consumers and 
cause a company to change its practices.
Response to Comments and Findings
    Number of individual claims. Comments that asserted that the Study 
methodology undercounted the number of individual claims filed in court 
or arbitration are addressed above in Part III.D. Beyond the debates 
about specific sources and counting methodologies, the Bureau 
emphasizes that it did not purport to provide a comprehensive report of 
the entire universe of individual consumer financial claims but instead 
offered data that is indicative of the larger market. Taken together, 
the total number of individual consumer financial claims identified in 
the Study was approximately 2,400 per year.\486\ Even multiplying those 
2,400 claims by 10 or 100 to account for the markets and jurisdictions 
the Study did not analyze would amount to less than 250,000 individual 
claims. The result would still be a low number of individual claims in 
relation to the hundreds of millions of individual consumer financial 
products and services. The Bureau believes this supports the finding 
that a small number of consumers seek individual redress either through 
arbitration or the courts.\487\ Accordingly, the Bureau finds, in 
accordance with the preliminary findings, that the number of individual 
filings is low in comparison to the relative size of the market for 
consumer financial products and services.
---------------------------------------------------------------------------

    \486\ 1,200 in Federal court, 800 in small claims court, and 400 
in arbitration.
    \487\ 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 3, section 8 at 40.
---------------------------------------------------------------------------

    Explanations for number of individual claims. Many industry 
commenters disagreed with the Bureau's preliminary findings as to why 
consumers do not file many individual claims. For example, one research 
center commenter stated that claims under certain of the consumer 
financial laws that provide for statutory damages or double or treble 
actual damages if the consumer prevails are necessarily large enough to 
incentivize consumers and attorneys to pursue the claims. The Bureau 
disagrees. First, as a matter of logic and as supported by examples 
provided by several public-interest consumer lawyer and consumer lawyer 
and law firm commenters, statutory damages cannot incentivize a 
consumer to bring a claim about which he or she is unaware. For 
example, consumers who do not receive the disclosures to which they are 
entitled may not know that something was missing. Consumers who are 
subject to discrimination may not know that others are being treated 
more favorably. Consumers who are charged a fee disallowed by State law 
or contract may not know that the fee was impermissible. In some cases, 
consumers may not even be aware that any action has been taken with 
respect to them. For example, the Bureau recently settled an 
enforcement action with a large bank related to its widespread practice 
of opening consumer accounts without their knowledge.\488\ Because most 
of the victims of this conduct were unaware that the accounts were 
being opened, those customers could not have complained about those 
accounts to the bank through either formal or informal mechanisms.
---------------------------------------------------------------------------

    \488\ Press Release, Bureau of Consumer Fin. Prot., ``Consumer 
Financial Protection Bureau Fines Wells Fargo $100 Million for 
Widespread Illegal Practice of Secretly Opening Unauthorized 
Accounts,'' (Sept. 8, 2016), available at http://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-fines-wells-fargo-100-million-widespread-illegal-practice-secretly-opening-unauthorized-accounts/.
---------------------------------------------------------------------------

    Second, even if a consumer is aware that he or she was harmed, the 
availability of statutory damages and attorney's fees (or even 
particularized types of relief like restitution and rescission 
available under certain State's laws, as one commenter suggested) could 
only incentivize filing a claim over a small harm if the consumer were 
aware of those statutory provisions. While there may be some well-
informed consumers who are aware and thus seek out an attorney to 
pursue such claims, the Bureau believes--based on its expertise and 
experience with consumer financial markets and as was noted by several 
commenters--that those consumers are likely in the minority. Indeed, 
the consumer survey conducted as part of the Study, as well as the 
nonprofit's survey noted above, is indicative of how unlikely consumers 
are to pursue claims even when they are confident they have been 
wronged and contradicts industry comments suggesting otherwise.\489\
---------------------------------------------------------------------------

    \489\ See Pew study, supra note 476. As an industry commenter 
noted, 23 percent of wronged consumers in the nonprofit's survey 
would pursue a legal remedy.
---------------------------------------------------------------------------

    Third, even if a consumer is both aware of a wrong and aware of the 
availability of statutory damages and attorney's fees, the statutory 
damages or attorney's fees may be insufficient motivation for the 
consumer or his or her attorney given the uncertainty of recovery and 
the potential size of such recovery relative to the time required to 
pursue the claim even if the potential value of that claim is larger 
than the consumer's actual damages.\490\ Notably, most industry 
commenters did not disagree with the Bureau's preliminary finding that 
it is difficult for consumers to find attorneys for small claims; 
indeed, one industry commenter cited a study finding that attorneys 
will not take a claim valued at less than $60,000--much higher than the 
$1,000 or $1,500 in statutory damages provided by many of the consumer 
financial statutes. Thus, even if, as one commenter suggests, most 
claims are above $1,000, they may still be too small to be worth the 
time for most consumers to find an attorney to pursue them. And as 
discussed further below, even if individual arbitration reduces the 
amount of time and need for attorney representation relative to 
individual litigation, the Bureau believes that the time required to 
pursue small claims is still sufficient to discourage many consumers 
from doing so. Moreover, there are many claims concerning consumer 
financial products or services for which statutory damages are not 
available, including common law tort and contract claims.
---------------------------------------------------------------------------

    \490\ In other words, an attorney considering a TILA case that 
allows for recovery of attorney's fees must discount his or her fee 
by the likelihood that the consumer will not prevail or will accept 
a settlement that compensates that attorney for less than all of the 
attorney's incurred fees and costs in the case. It is this calculus 
that makes many such cases undesirable for plaintiff's attorneys.
---------------------------------------------------------------------------

    A research center commenter also suggested that small claims are 
more commonly filed in arbitration with respect to non-consumer 
financial

[[Page 33260]]

products and services than for consumer finance claims, which the 
commenter believes may reflect something particular about consumer 
finance claims. While a small claims filing rate of 3.5 percent for all 
types of claims is higher than a small claims filing rate of 2 percent 
for consumer finance claims, both are low rates of filing. Indeed, even 
if the number of consumer finance arbitration cases involving small 
claims were to double, to 4 percent, that would mean only an additional 
25 cases per year, still a very low figure.\491\ With respect to 
commenters that suggested that consumers do not file individual claims 
because their disputes are adequately resolved through public 
enforcement, the Bureau will respond to that argument in depth below in 
Part VI.B.5.
---------------------------------------------------------------------------

    \491\ Study, supra note 3, section 5 at 10 (finding 25 AAA 
disputes per year which involved consumer affirmative claims under 
$1,000 across six markets studied).
---------------------------------------------------------------------------

    Consumer attitudes regarding arbitration. With respect to the 
comments that suggested that consumers' current attitudes and awareness 
levels about arbitration tend to suppress the number of individual 
arbitrations but could be shifted over time, the Bureau views those 
suggestions as speculative and not persuasive. Arbitration agreements 
have existed in consumer finance contracts since the early 1990s, 
meaning consumer have had more than 20 years to become aware of 
arbitration and yet the Study found that consumers file only a few 
hundred arbitrations a year. Thus, arbitration is hardly novel and the 
Bureau doubts that novelty is depressing consumer filings in 
arbitration. Indeed, the availability of individual litigation is not 
novel, yet consumers rarely bring individual cases in court either.
    Even assuming for the sake of argument that the low use of 
arbitration were attributable to awareness levels, the Bureau is 
skeptical as to whether it is realistic to believe that all or most 
consumers could be educated about the terms of arbitration agreements 
to significantly improve consumer attitudes or awareness. Indeed, even 
if every consumer subject to an arbitration agreement received 
education about arbitration, understood the agreement's terms and had a 
positive attitude toward arbitration--and even if every arbitration 
agreement provided for company-paid filing fees and minimum award 
amounts--it still would be the case that use of the arbitration system 
would be limited by consumers' lack of awareness of potential legal 
violations, reluctance to pursue formal claims, and the low value of 
their claims relative to the time required to pursue their claims.
    For all these reasons, the Bureau finds that there are structural 
and behavioral factors that prevent individual dispute resolution 
systems--including both arbitration and litigation--from providing an 
adequate or effective means of assuring that harms to consumers are 
redressed.
    Informal dispute resolution. As for the industry commenters that 
disagreed with the Bureau's preliminary finding that informal dispute 
resolution cannot explain the low volume of individual cases observed, 
the Bureau is not persuaded. The Bureau acknowledges that informal 
dispute resolution provides at least some relief to some consumers who 
are harmed by and complain to their consumer financial service 
providers. The Bureau stated in the proposal that it 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. Indeed, the Bureau cited 
such evidence in the proposal arising out of the Overdraft MDL 
(approximately $15 million in informal relief had been provided by 
defendants in those cases), and commenters provided evidence of studies 
reflecting that companies sometimes provide informal relief to 
consumers.\492\ The Bureau's consumer complaint function is 
specifically designed to facilitate informal dispute resolution and has 
been successful in doing so for many thousands of consumers. The 
Bureau's concern, however, is not with those complaints that are 
resolved, but with those situations in which consumers are unaware of 
harm in the first instance or are aware of harm but do not advocate for 
informal resolution as effectively as other complainants, as well as 
with those complaints that are resolved in ways that do not affect the 
financial institution's future behavior.
---------------------------------------------------------------------------

    \492\ With respect to the commenter that cited $1.3 billion in 
consumer relief provided by AT&T as established by the record in the 
Concepcion litigation, the record in that case is not fully 
developed and does not provide enough detail for the Bureau to be 
able to establish that all of the $1.3 billion in manual credits 
reflects relief provided to customers who complained to AT&T. See 
Berinhout Declaration at  17, Trujillo v. Apple Computer, 
Inc., No. 07-4946 (N.D. Ill. Oct. 16, 2007), ECF No. 40. The record 
does not explain, for example, how the $1.3 billion was calculated, 
how the $1.3 billion compares to the amount actually requested by 
consumers, nor how much of the consumer relief was necessarily the 
result of a consumer complaint or the resolution of such complaint. 
Laster v. T-Mobile USA, Inc., 2008 WL 5216255, *15 (S.D. Cal. Aug. 
11, 2008). Furthermore, assuming this figure is accurate, the Bureau 
cannot evaluate the revenue generated by AT&T from other consumers 
who did not complain or whose complaints were rejected by AT&T and 
received no part of the amount that AT&T refunded.
---------------------------------------------------------------------------

    As noted in the proposal and discussed further above, for a variety 
of reasons, many consumers may not be aware of whether a company they 
deal with is complying with the law or not. Furthermore, consumers may 
not even think about a company's customer service function as a way of 
seeking redress for certain types of wrongs. For example, the Bureau 
believes, based on its experience and expertise, that consumers are 
unlikely to know when they have received inadequate disclosures and, 
even if they do, they are unlikely to call a customer service 
department over such an issue. Similarly, the Bureau is not aware of 
informal dispute resolution successfully resolving complaints of 
discrimination, systematic miscalculations of interest rates, certain 
types of deceptive advertising,\493\ improper furnishing of credit 
information about which the consumer was unaware, and other common 
harms that are largely imperceptible to the average consumer. Consumers 
are more likely to use a customer service function, for example, to 
question charges that appear on their bill, including fees assessed by 
the financial institution. Even in those cases, the consumer first must 
notice the charge and, in some instances, further recognize that there 
is some basis to challenge or question the charge if the initial 
request is rebuffed. Based on its experience, the Bureau does not 
believe that even a majority of consumers have such an awareness. Thus, 
an informal dispute resolution system is unlikely to be used by most or 
all consumers who are adversely affected by a particular illegal 
practice. For example, one survey cited by a commenter showed that only 
28 percent of consumers surveyed had ever asked to have such fees 
waived and not all of these were successful.\494\ In other words, most 
consumers simply do not seek informal resolution of wrongful

[[Page 33261]]

actions. Moreover, commenters noted and studies have found that poorer 
and less educated consumers are less likely to seek resolution of 
disputes through informal means because they lack sufficient 
information to pursue claims informally, are unfamiliar with the 
process, or do not have the time to pursue it.\495\ As to commenters 
who suggested that the Bureau overlooked that consumers can pursue 
claims informally by contacting their State attorneys general or other 
regulators, the Bureau does not believe that it overlooked a 
substantial number of complaints that consumers file with State 
attorneys general or other State regulators. To the extent that they 
do, the Bureau addresses the ability of State enforcement agencies to 
remedy harms in section VI.B.5 below.
---------------------------------------------------------------------------

    \493\ For example, the Bureau entered into a settlement in 2014 
with a mortgage company for deceptive advertising about which most 
individual consumers likely were not aware. Press Release, Bureau of 
Consumer Fin. Prot., ``CFPB Orders Amerisave to Pay $19.3 Million 
for Bait-And-Switch Mortgage Scheme,'' (Aug. 12, 2014), available at 
https://www.consumerfinance.gov/about-us/newsroom/cfpb-orders-amerisave-to-pay-19-3-million-for-bait-and-switch-mortgage-scheme/.
    \494\ Martin Merzer, ``Poll: Asking for Better Credit Card Terms 
Pays Off,'' CreditCards.com (Sept. 24, 2014), available at http://www.creditcards.com/credit-card-news/poll-ask-better-terms.php.
    \495\ Rory Van Loo, ``The Corporation as Courthouse,'' 33 Yale 
J. Reg. 547, at 579 (2016) (``Studies have shown for decades that 
wealthy and better educated consumers are more likely to complain to 
corporations and more successful than are low-income consumers.''); 
Amy J. Schmitz, ``Remedy Realities in Business-To-Consumer 
Contracting,'' 58 Ariz. L. Rev. 213, at 231 (2016) (``the proactive 
consumers who obtain remedies tend to be of higher income and 
education'').
---------------------------------------------------------------------------

    Further, none of the evidence cited by commenters refuted the 
Bureau's preliminary finding that companies can and do choose--for any 
reason--not to resolve complaints informally, and that the outcome of 
these disputes may be unrelated to the underlying merits of the 
complaint.\496\ As noted in the proposal, 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 or similarities between 
the complaints, the company retains discretion to decide how to resolve 
them. This is true even with respect to providers that are member-
owned, like credit unions. 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.\497\ Indeed, as 
the Bureau stated in the proposal, 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 for complaining 
consumers based on such scores.\498\ For example, in the study of a 
midsize bank in Texas cited by some commenters, 44 percent of consumers 
who complained about one type of fee were not offered a refund in one 
city in which the bank operated.\499\ While there is no way to know 
whether the complaints that consumers made in that study reflect 
violations of the law, it shows the differential treatment that can 
occur. Furthermore, in some markets, consumers have no choice as to 
their provider, and thus companies need not worry about losing the 
consumer's business if complaints are left unresolved. This is most 
obviously true with respect to servicing markets, such as student loan 
servicing and debt collection.
---------------------------------------------------------------------------

    \496\ Some 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 Mktg. Res. 337, at 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 et 
al., ``Complaint Handling: Principles and Best Practice,'' at 6 
(Univ. of Leicester, Centre for Util. Consumer L. April 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.
    \497\ 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, ``Arbitration Study: A 
Summary and Critique,'' at 31 (Mercatus Ctr. at Geo. Mason U., 
Working Paper, 2015) (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 did 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.
    \498\ 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 Bureau notes that 
this article is not an editorial as suggested by one industry 
commenter. See also Amy J. Schmitz, ``Remedy Realities in Business-
To-Consumer Contracting,'' 58 Ariz. L. Rev. 213, at 230 (2016) 
(explaining why various groups, such as minorities, women and low-
income consumers are less likely to complain and to achieve a 
positive resolution).
    \499\ In a preliminary draft of his research paper, one 
commenter addressed this issue and suggested that banks look at 
whether the investment in resolving a consumer's concern is worth it 
when compared to the likelihood that the bank will make a profit off 
of that customer in the future. See Jason Scott Johnston, 
``Preliminary Report: Class Actions and the Economics of Internal 
Dispute Resolution and Financial Fee Forgiveness,'' (Manhattan Inst. 
Rept. 2016), available at https://www.manhattan-institute.org/html/class-actions-and-economics-internal-dispute-resolution-and-financial-fee.
---------------------------------------------------------------------------

    One research center commenter agreed with the Bureau's preliminary 
findings in this regard and stated its belief that a company should 
deny informal relief to less profitable consumers in order to maintain 
reasonable fees for other more profitable consumers. The Bureau agrees 
that in the context of informal complaint handling systems--which do 
not adjudicate the merits of claims but rather exist to enhance a 
company's business interests--it is rational for a company to forgive a 
fee charged to a profitable consumer and not to do so for an 
unprofitable consumer. But that is precisely the point: in the eyes of 
the law, wrongful fees should be reimbursed without regard to the 
profitability of the customer incurring the fee. This commenter's 
argument thus illustrated one of the limitations of informal dispute 
resolution as a method of enforcing the consumer protection laws. In 
this realm, a company can choose which complaints it wishes to resolve 
for which consumers, and that choice is likely to be very different 
than the decision made by a neutral judge after a consumer has filed a 
claim alleging violations of the law.
    As noted in the proposal, the Study's discussion of the Overdraft 
MDL provided an example of the limitations of informal dispute 
resolution and the important role of class litigation in more 
effectively resolving consumers' disputes.\500\ In the cases included 
in the Overdraft MDL, certain customers lodged informal complaints with 
banks about the overdraft fees. The subsequent litigation revealed that 
banks had been ordering transactions based on the size of the 
transaction from 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, nearly 29 million bank 
customers received cash relief in court settlements over and above 
relief through informal dispute resolution

[[Page 33262]]

processes.\501\ Furthermore, the litigation resulted in fundamental 
changes in the banks' transaction ordering processes that had not 
previously occurred as a result of the informal complaints and informal 
relief. While industry commenters cited this example as an instance 
where informal dispute resolution provided significant relief, it also 
supports the Bureau's conclusion that informal dispute resolution does 
not provide systemic relief of consumer harms.
---------------------------------------------------------------------------

    \500\ Study, supra note 3, section 8 at 39-46.
    \501\ In total, 18 banks paid $1 billion in settlement relief to 
nearly 29 million consumers. Id. (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 and 46 n.63.
---------------------------------------------------------------------------

    As to commenters' arguments that companies with arbitration 
agreements have strong incentives to resolve complaints in consumers' 
favor in order to avoid the cost of arbitral fees and the risk of 
paying a ``bonus'' award, the Bureau acknowledges that companies with 
arbitration agreements have at least some incentive to resolve informal 
disputes with consumers especially when the company suspects that the 
consumer, if unsatisfied, will file an arbitration case and cause the 
company to incur filing fees. It is also true that companies without 
arbitration agreements have an incentive to resolve informal disputes 
with consumers when they suspect that litigation will otherwise result, 
since litigation can result in defense costs which exceed the costs of 
arbitral fees or of arbitral defense. It is unclear, at best, whether 
arbitration agreements create greater incentives to resolve a complaint 
informally than the risk of litigation and commenters did not provide 
data or evidence to show otherwise.\502\ Indeed, one recent news 
article about AT&T--a company that includes a ``bonus'' provision in 
its arbitration agreements--reports that only 18 of its approximately 
150 million customers filed claims in arbitration against the company 
over a two-year period.\503\ In any event, whatever the source of the 
incentives that might encourage a company to settle a consumer dispute 
informally, these incentives only go so far, particularly when the 
company knows that the vast majority of consumers who complain will not 
formally pursue the matter and that individual complaints can be 
resolved informally without systemic change. For example, as discussed 
above in this Part VI.B.2 with respect to the explanation for the low 
number of individual claims consumers file, the Bureau recently settled 
an enforcement action with a large bank concerning its employees' 
practices of opening unauthorized accounts on behalf of customers that 
had pre-existing accounts with the bank.\504\ During the Bureau's 
investigation of that bank, it uncovered that some individual consumers 
had discovered the unauthorized accounts and complained about them; but 
the bank's employees nevertheless continued the widespread practice 
with respect to many other customers. Similarly, the Bureau settled 
another enforcement case with a buy-here, pay-here automobile dealer 
concerning violations of the FDCPA and the FCRA in which the Bureau 
discovered that several customers had disputed the improper credit 
reporting information with the dealer without the dealer taking any 
corrective action.\505\ In some instances, the dealer informed the 
customers in writing that the account information had been corrected 
when it had not been.\506\
---------------------------------------------------------------------------

    \502\ One commenter, a research center, suggested that the 
Bureau should have analyzed the historical evolution of such bonus 
provisions. The Preliminary Results did analyze their prevalence and 
found them to be rarely used. See Preliminary Results, supra note 
150, at 51.
    \503\ Anna Werner and Megan Towey, ``AT&T and DirecTV Face 
Thousands of Complaints Linked to Overcharging, Promotions,'' CBS 
Evening News (May 16, 2017), available at http://www.cbsnews.com/news/complaints-att-directv-bundled-services-directv-customers-promotions-overcharging/. See also Concepcion, 563 U.S. at 337 
(describing AT&T's ``bonus'' provision which, in the event that a 
customer receives an arbitration award greater than the company's 
last written settlement offer, requires it to pay a $7,500 minimum 
recovery and twice the amount of the claimant's attorney's fees.).
    \504\ See Press Release, Bureau of Consumer Fin. Prot., 
``Consumer Financial Protection Bureau Fines Wells Fargo $100 
Million for Widespread Illegal Practice of Secretly Opening 
Unauthorized Accounts,'' (Sept. 8, 2016), available at http://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-fines-wells-fargo-100-million-widespread-illegal-practice-secretly-opening-unauthorized-accounts/.
    \505\ Press Release, Bureau of Consumer Fin. Prot., ``CFPB Takes 
First Action Against `Buy-Here, Pay-Here' Auto Dealer,'' (Nov. 9, 
2014), available at https://www.consumerfinance.gov/about-us/newsroom/cfpb-takes-first-action-against-buy-here-pay-here-auto-dealer/.
    \506\ DriveTime Automotive Group, Inc., CFPB No. 2014-CFPB-0017, 
Consent Order at ]] 42, 43 (Nov. 19, 2014), available at http://files.consumerfinance.gov/f/201411_cfpb_consent-order_drivetime.pdf.
---------------------------------------------------------------------------

    With respect to the comments that suggested that there were few 
individual claims because companies will change practices that harm 
consumers when consumers complain on social media, the Bureau believes 
that social media are insufficient to force companies to change company 
practices and, by extension, to enforce the consumer protection laws 
for the same primary reason that informal dispute resolution is 
insufficient--because many consumers do not know that they have valid 
complaints or how to raise their claims through social media. Further, 
companies can choose either to ignore or resolve such complaints at 
their own option especially in markets where consumers cannot take 
their business elsewhere; and companies can resolve complaints on a 
one-off basis with the individual complainant. Indeed, as discussed 
above in Part II.E, at least one study of social media complaints found 
that companies ignored nearly half of the complaints consumers 
submitted and that when companies did respond, consumers were 
dissatisfied in roughly 60 percent of the cases.\507\
---------------------------------------------------------------------------

    \507\ Sabine A. Einwiller & Sarah Steilen, ``Handling Complaints 
on Social Network Sites--An Analysis of Complaints and Complaint 
Responses on Facebook and Twitter Pages of Large US Companies,'' 41 
Pub. Rel. Rev. 195, at 197-200 (2015).
---------------------------------------------------------------------------

    Thus, while informal dispute resolution systems may provide some 
relief to some consumers, the Bureau finds that these systems alone are 
inadequate mechanisms to resolve potential violations of the law that 
broadly apply to many customers of a particular company for a given 
product or service. The Bureau further finds that the prevalence of 
these systems cannot and does not explain the low volume of individual 
cases pursued through arbitration, small claims courts, and in Federal 
court.
3. Class Actions Provide a More Effective Means of Securing Significant 
Consumer Relief for Large Numbers of Consumers and Changing Companies' 
Illegal and Potentially Illegal Behavior
    The Bureau preliminarily found, based on the results of the Study 
and its further analysis, that the class action procedure provides an 
important mechanism to remedy consumer harm. More specifically, the 
Bureau preliminarily found, consistent with the Study, that class 
action settlements are a more effective means than individual 
arbitration (or litigation) for assuring that large numbers of 
consumers are able to obtain monetary and injunctive relief for 
wrongful conduct, especially for claims over small amounts.
    As noted in the preliminary findings, in the five-year period 
studied, the Bureau was able to analyze the results of 419 Federal 
consumer finance class actions that reached final class settlements. 
These settlements involved, conservatively, about 160 million consumers 
and about $2.7 billion in

[[Page 33263]]

gross relief of which, after subtracting fees and costs, made $2.2 
billion available to be paid to consumers in cash relief or in-kind 
relief.\508\ Further, as set out in the Study, nearly 24 million class 
members in 137 settlements received automatic distributions, meaning 
they received payments without having to file claims.\509\ In the five 
years of class settlements studied, at least 34 million consumers 
received $1.1 billion in payments.\510\ 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 beyond simply to comply with the law. The 
Bureau further preliminarily found that 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, both 
because putative class members may still be able to obtain relief on a 
classwide basis after those individual outcomes and because the cost of 
defending a putative class case that ends in this manner is relatively 
low in comparison to the cases that provide class relief.
---------------------------------------------------------------------------

    \508\ These figures exclude cy pres relief that is distributed 
to a third party (often a charity) on behalf of consumers, instead 
of to consumers directly, in cases where making payments to 
consumers directly is difficult or impossible. 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 3, 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 automobile 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.
    \509\ Id. section 8 at 27.
    \510\ As noted above, see Johnston & Zywicki, supra note 335 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 3, 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.
---------------------------------------------------------------------------

    Based on its experience and expertise--including its review and 
monitoring of these settlements and its enforcement of Federal consumer 
financial law through both enforcement and supervisory actions--the 
Bureau also preliminarily found that behavioral relief could be, when 
provided, at least as important for consumers as monetary relief. 
Indeed, prospective relief can provide more relief to more affected 
consumers, and for a longer period, than retrospective relief because a 
settlement period is limited (and provides a fixed amount of cash 
relief to a fixed number of consumers), whereas injunctive relief lasts 
for years or may be permanent and may apply to more than just the 
defined class.
    In the discussion that follows, the Bureau reviews comments on 
these two preliminary findings, addresses concerns raised in those 
comments, and makes its final findings on these issues. At the outset, 
the Bureau notes that the bulk of the critical comments it received on 
these preliminary findings concern the actual cash compensation to 
consumers in class action settlements and other related concerns 
commenters have about class actions, with far fewer commenters 
addressing behavioral relief despite its relative importance to the 
Bureau's preliminary findings. Thus, while the bulk of the discussion 
focuses on the former preliminary finding, the Bureau emphasizes below 
the non-monetary benefits of class actions.\511\
---------------------------------------------------------------------------

    \511\ An additional important benefit of the rule is the general 
deterrent effect of class actions. That is addressed below in Part 
VI.C.1, insofar as this part focuses on the benefits of class 
actions as documented in the Study and Part VI.C.1 focuses on the 
benefits the Bureau expects consumers to derive from the rule.
---------------------------------------------------------------------------

Comments Received
    Monetary Relief Provided by Class Actions. Many industry and 
research center commenters disagreed with the Bureau's preliminary 
finding that class actions provide significant monetary relief to 
consumers who have been harmed; instead, these commenters highlighted 
the fact that the Study showed that individuals received, on average, 
only $32 per person from the class action settlements studied.\512\ 
Some of these industry and research center commenters further pointed 
out that the average recovery of $32 is particularly low if compared to 
the Study's finding that consumers who win claims in arbitration 
recover an average of nearly $5,000 per claim. One commenter provided 
examples of specific cases involving low payouts. A group of automobile 
dealers and a law firm representing automobile dealers in California 
similarly commented that in the class actions studied concerning 
automobile loans, the average relief provided was $337 per consumer, 
less than a typical consumer's monthly car payment. In this commenter's 
view, that average recovery is very low in light of the value of the 
claims asserted in a typical case concerning automobile loans. 
Relatedly, the same group of automobile dealers and another group of 
trade associations representing automobile dealers criticized class 
action settlements as unnecessary for cases in which consumers have 
claims worth higher dollar amounts, such as, in the commenter's view, 
claims concerning automobile purchase loans. These commenters asserted 
that individual consumers have sufficient incentive to bring individual 
claims concerning these products, which the commenter asserted were 
typically for $1,000 or more (though it cited no data in support of 
this figure).\513\
---------------------------------------------------------------------------

    \512\ The Bureau notes that $32 is an approximation derived from 
data in the Study, supra note 3, section 8. The Bureau believes that 
this $32-per-class-member recovery figure is a reasonable estimate.
    \513\ Another automobile dealer commenter pointed out that 
arbitration agreements between automobile dealers and consumers are 
different than arbitration agreements concerning other products or 
services because the automobile dealers provide their arbitration 
agreements as a separate document, rather than as part of the 
purchase contract.
---------------------------------------------------------------------------

    Numerous consumer advocates, academics, consumer law firms and 
research center commenters agreed with the Bureau's preliminary finding 
that class actions provide substantial monetary relief to consumers. 
Many of these commenters highlighted the sums reported by the Bureau in 
the Study--that at least 160 million class members were eligible for 
relief via class action settlements over the five-year period studied; 
that those settlements totaled $2.7 billion in cash, in-kind relief, 
and attorney's fees and expenses; and that consumers actually received 
at least $1.1 billion in those cases. The commenters stated that, in 
their view, these are substantial sums and that if many providers had 
not used pre-dispute arbitration agreements, these sums would have been 
substantially higher. The academic commenters, citing the Study, 
concluded that class actions are a powerful tool that can help 
consumers vindicate their rights under Federal and State law. They 
cited both funds returned to consumer and the deterrent effect of class 
actions.
    Numerous consumer advocates, public-interest consumer lawyer, and

[[Page 33264]]

consumer lawyers and law firms provided specific examples from their 
own experiences where class actions caused defendants to stop harmful 
practices and consumers received substantial monetary amounts as a 
result of class action settlements. One of the consumer law firms 
reported that it had obtained millions in relief for consumers via 
class actions. Another consumer law firm commenter noted that, in its 
experience, these cases frequently involved automatic payouts to class 
members, who did not need to submit a form or other documentation to 
receive the benefit of the settlement. Another commenter noted that 
class actions provide a practical and efficient way to allow consumers 
to recover for relatively low-value abuses. Similarly, several 
commenters suggested that by allowing class actions, the Bureau would 
make it possible for consumers to achieve relief when they largely 
would be unable to do so if arbitration agreements continue to be used 
as they are now. A public-interest consumer lawyer and a consumer 
advocate commenter each stated that the very nature of class action 
claims--that they are often low value--emphasizes their overall 
importance because consumers will not otherwise receive relief for 
those claims. The commenter further asserted that, when multiplied out, 
the practices at issue in those cases often generate substantial 
profits to providers. A consumer law firm commenter noted that class 
actions require the settling company to repay all consumers who are 
members of the affected class, not just those individuals who take the 
time to assert a claim.
    Other industry and research center commenters suggested that 
consumers do not obtain significant relief from class actions because 
settlements often require consumers to file claims to obtain relief, 
which most consumers do not do. For example, many industry commenters 
noted that in settlements requiring consumers to file a claim to obtain 
relief, the Study showed that only 4 percent of consumers filed a 
claim.\514\ Thus, these commenters contended that class action 
settlements do not serve their compensatory purpose. Further, a few 
industry commenters contended that taking into account both the 4 
percent claims rate in class settlements where consumers were required 
to submit a claim and the fact that the Study found that only 12 
percent of putative class cases in the six selected markets resulted in 
a classwide settlement as of the Study cutoff date, there is a very low 
likelihood that a consumer in a putative class case actually receives 
any compensation from any case filed as a class action. One industry 
commenter cited a study of class action settlements concerning claims 
under certain consumer protection statutes that estimated that only 9 
percent of the total monetary award in those cases actually went to the 
plaintiffs as further support for its positions that class actions do 
not provide significant relief to consumers.\515\ Expressing a related 
concern, an industry commenter stated that it did not find data in the 
Study of how consumers fared in class action settlements. This 
commenter stated that the 4 percent claims rate indicated that awards 
were so small as to not be worth the effort required to make a claim. 
The commenter asserted that the Study did not contain enough detail on 
the nature of the settlements or explain how the Bureau was able to 
conclude that class actions were preferable to arbitration (where 32 
consumers recovered over $5,000). A research center commenter further 
stated its belief that low-income consumers are less likely to file 
claims and thus such settlements function as a regressive tax on low-
income consumers in favor of plaintiff's attorneys. Relatedly, an 
industry commenter asserted that the Bureau overstates the benefit 
provided by most class actions--gross relief in almost half of the 
settlements was $100,000 or less and the gross relief in 79 percent was 
$1 million or less.
---------------------------------------------------------------------------

    \514\ Study, supra note 3, section 8 at 30.
    \515\ Joanna Shepherd, ``An Empirical Survey of No-Inquiry Class 
Actions,'' at 2 (Emory U. Sch. of L., Res. Paper No. 16-402, 2016) 
(these ``no injury'' class actions were not limited to cases 
concerning consumer financial products, as discussed in more detail 
below in this Part VI.B.3 where the Bureau responds to these 
comments).
---------------------------------------------------------------------------

    Several industry and research center commenters further criticized 
the Bureau's reliance on the Study to support its findings that class 
actions provide significant relief to consumers on the basis that 
certain cases should have been excluded from the analysis. For example, 
one research center commenter asserted that a large settlement 
involving a credit reporting agency should have been excluded as 
distorting the overall effect because it provided $575 million of ``in-
kind'' relief rather than actual cash relief. A number of others 
commented that the Study's findings on the overall amount of relief 
provided in class actions was not representative of consumer finance 
class actions generally because the Overdraft MDL class-action 
settlements included in the Study were atypically large and unlikely to 
recur. A research center commenter also noted that if those large 
settlements were excluded from the Study's data, the average payment to 
an individual consumer from a class action settlement analyzed in the 
Study would be $14, a significant reduction from the $32 per consumer 
average payment for the Study as a whole.\516\ In these commenters' 
view, the overdraft settlements distorted the Study to make it seem 
that consumers get much more relief than class actions typically 
provide. Further, one industry commenter asserted that the overdraft 
settlements may not have been as large had the overdraft activity 
occurred later because the practices could have been the subject of a 
Bureau enforcement action. That same industry commenter suggested that 
the Bureau failed to assess the extent to which consumers' overdraft 
complaints were resolved through informal channels before the class 
actions commenced. The commenter also suggested that the conduct at 
issue was not actually illegal.
---------------------------------------------------------------------------

    \516\ Study, supra note 3, section 8 at 18 tbl. 3.
---------------------------------------------------------------------------

    One research center commenter contended that the value of the 
overdraft settlements should be discounted because the settlements do 
not make customers of those providers better off, overall. This 
commenter hypothesized that most of the overdraft fee refunds went to 
low-income consumers and that the defendant banks likely perceived 
those customers as less profitable following the settlements (since 
they could no longer assess as many overdraft fees). The commenter 
posited that, in the event such customers become unprofitable, the 
settling banks will screen those low-income customers from their 
customer base in the future, resulting in higher fees for the customers 
who remain. This commenter stated that after the Overdraft MDL 
settlements, minimum balance requirements to avoid checking account 
fees have generally increased and asserted that this may be linked to 
class action liability, though that link has not been empirically 
established.
    Behavioral and In-Kind Relief in Class Actions. Several industry 
and research center commenters disagreed with the Bureau's preliminary 
findings that class settlements benefit non-class members because they 
cause companies to change their harmful practices with respect to all 
consumers, asserting that companies agreed to behavioral relief in only 
13 percent of the class action settlements analyzed. Many industry and 
research center commenters further stated their belief that class 
actions do not provide significant relief to consumers because of the 
prevalence of non-cash and coupon relief in lieu of providing cash

[[Page 33265]]

directly to consumers in class action settlements.\517\ For example, 
one industry commenter noted that the Study found relief other than 
direct cash payments, including coupon settlements, are provided nearly 
10 times as often (for 316 million consumers) as cash relief (for 34 
million consumers). The same commenter criticized class actions 
settlements generally but cited only to examples that did not involve 
consumer finance that provided consumers with ``worthless'' coupons for 
future service from the defendant company, rather than with cash.
---------------------------------------------------------------------------

    \517\ A coupon settlement is one in which a company provides 
class members with a ``coupon'' or other discount of the purchase of 
a future product or service.
---------------------------------------------------------------------------

    In contrast, many consumer advocate, consumer law firm and 
nonprofit commenters agreed with the Bureau's assertion that companies 
often change their behavior in ways that benefit consumers as the 
result of class action settlements. One such commenter emphasized the 
fact that many class action settlements include injunctive relief, such 
as requiring companies to stop harmful practices that led to the class 
action, to agree to outside monitoring to ensure that further 
misconduct does not occur, or to provide increased training or other 
safeguards to improve future compliance with the law. As an example, 
one nonprofit commenter cited a class action settlement involving two 
money transmission companies that agreed to not only compensate 
consumers but also to halt their use of unfavorable exchange rates, 
provide better disclosures, and develop a community fund. As another 
example, a consumer law firm commenter explained how a class action was 
able to provide complete relief to all affected consumers. This relief 
included not only cash compensation for their injuries but also 
injunctive relief that was able to resolve the problem permanently and 
for all affected in a way that an individual action would not have been 
able to do. Other commenters provided similar examples.
    Proportion of Cases Filed as Class Actions That Ultimately Provide 
Classwide Relief. Many industry and research center commenters 
criticized the Bureau's preliminary finding that class actions provide 
significant relief to consumers based on a contention that the majority 
of cases filed as class actions do not, in fact, result in class 
settlement. The commenters asserted that such cases do not provide any 
relief to consumers other than the named plaintiff when the case 
settles on an individual basis, while imposing significant costs on 
providers. As noted above, numerous such commenters noted that only 12 
percent of the putative class action filings analyzed in the Bureau's 
Study resulted in a class action settlement as of the Study cutoff 
date, while the remainder of the cases filed as class actions resulted 
in no classwide relief at all.\518\ These commenters pointed out that 
just over 60 percent of the cases filed as putative class actions 
resulted in either an individual settlement between the defendant(s) 
and the named plaintiff or a voluntary withdrawal of the case by the 
named plaintiff (which could also signal that the parties reached an 
individual settlement). Some commenters further contended that when 
putative class cases end in a settlement or potential settlement with 
only the named plaintiff, that outcome may indicate that the case 
lacked merit.
---------------------------------------------------------------------------

    \518\ Study, supra note 3, section 6 at 37.
---------------------------------------------------------------------------

    One industry commenter cited further studies indicating that only a 
fraction of cases filed as class actions ultimately result in classwide 
relief to consumers.\519\ One such study found that around one-third of 
the putative class cases resulted in classwide settlement, while 
another found that 20 percent to 40 percent resulted in such 
relief.\520\ A credit union commenter provided an example of a putative 
class action case in which the credit union was a defendant; a 
settlement was reached with the named plaintiff on an individual basis 
for a few thousand dollars, but the case cost the credit union tens of 
thousands in defense costs. The credit union commenter asserted that 
the plaintiff's attorney in that case privately admitted in oral 
conversation that the claims filed were meritless; the commenter did 
not explain why it chose to settle a case it knew to be meritless.
---------------------------------------------------------------------------

    \519\ Mayer Brown LLP, ``Do Class Actions Benefit Class Members? 
An Empirical Analysis of Class Actions,'' (Dec. 11, 2013), available 
at www.instituteforlegalreform.com/uploads/sites/1/Class_Action_Study.pdf.
    \520\ Id.; Jason S. Johnston, ``High Cost, Little Compensation, 
No Harm to Deter: New Evidence on Class Actions Under Federal 
Consumer Protection Statutes,'' (U. Va. Sch. of L., Res. Paper 
Series 2016-12, 2016).
---------------------------------------------------------------------------

    Some industry commenters challenged the Bureau's preliminary 
finding that non-class settlements in putative class action cases do 
not undermine the benefits of those cases that do result in classwide 
settlements. For example, one commenter disagreed with the Bureau's 
finding that putative class members could pursue subsequent claims 
after a case was settled on a non-class basis because the putative 
class members would not be bound by the non-class settlement. In this 
commenter's view, there is no evidence that such follow-on claims are 
actually brought and, in any event, the commenter asserted that such 
claims would likely lack merit and thus that it would be difficult for 
putative class members to find attorneys to assert them on a class 
basis.
    Merits of Claims Resolved by Class Action Settlements. Many 
industry commenters disagreed that class actions benefit consumers 
because they contended the Bureau erroneously assumed that a class 
action settlement necessarily redresses a violation of the law. For 
example, some industry commenters contended that companies agree to 
class action settlements when they have not violated the law or where 
the claims asserted are frivolous to avoid the significant expense of 
litigating and to avoid the risk of a much higher payout if the case 
were to survive certain stages of court review. In cases like these, 
the commenters contended that the settlement represents a failure of 
the litigation system because the company felt forced to settle claims 
that lacked merit, rather than a benefit to consumers or a redress of 
harm. One industry commenter supported this point by citing court 
decisions recognizing the pressure on companies to settle in class 
action cases. Some Tribal commenters stated their view that Tribal 
treasuries are at risk from the prospect of frivolous class action 
settlements which contradicts longstanding Federal law that provides 
that protecting the Tribal treasury against legal liability is 
essential to the protection of Tribal sovereignty.\521\
---------------------------------------------------------------------------

    \521\ E.g., Allen v. Gold Country Casino, 464 F.3d 1044, 1047 
(9th Cir. 2006).
---------------------------------------------------------------------------

    Another industry commenter contended that the Study's data that 
dispositive motions were granted before class settlement in 10 percent 
of the class actions studied is not relevant to whether the allegations 
in those cases were meritorious because defendants may choose to settle 
a case even after winning a dispositive motion to avoid the costs of 
litigation and appeal. The commenter stated that the low frequency of 
classwide judgments for consumers and plaintiffs who prevailed on 
dispositive motions suggests that the underlying claims in putative 
class cases lack merit or are frivolous. Some industry commenters 
expressed their view that class action litigation is inferior to other 
forms of dispute resolution, such as arbitration, because class action 
cases do not reach decisions

[[Page 33266]]

``on the merits'' given that class actions almost never go to trial, 
although they did not explain why the lack of a decision at trial 
necessarily makes class action litigation inferior. A few industry 
commenters pointed out that none of the cases identified in the 
Bureau's analysis of settlements went to trial and therefore that the 
class members in those putative class action cases never got a ``day in 
court.''
    A State attorney general commenter noted that, in his State, class 
action plaintiffs seeking to pursue a claim of consumer fraud were 
required to get approval from his office that the putative claim was 
not frivolous before it could be filed in court.\522\ His office has 
concluded that not a single one of these complaints was frivolous as 
alleged. This commenter made a similar point regarding a provision in 
CAFA that permits State attorneys general to review settlements.\523\ 
This review (done by a team of State attorneys general) has seldom 
found a settlement that was abusive or unfair.
---------------------------------------------------------------------------

    \522\ See Iowa Code ch. 714H.
    \523\ See 28 U.S.C. 1715(a).
---------------------------------------------------------------------------

    Other Concerns Regarding Class Actions. A few industry commenters 
noted that class actions proceed slowly and asserted that the value of 
the relief that they do provide is diminished by the length of time it 
takes to receive that relief. One industry commenter further noted that 
class actions proceed much more slowly than individual arbitration and 
asserted thus that individual arbitration is therefore a superior forum 
than class litigation.
    Several industry commenters noted that the Study found that 
consumers filed more individual arbitrations per year (411) than they 
did Federal class actions (187) and asserted that the Bureau should not 
have counted putative class members in those class actions as 
supporting its finding that class actions benefited more consumers than 
individual arbitration or litigation.
Response to Comments and Bureau Findings
    Monetary Relief Provided by Class Actions. Many industry commenters 
disagreed with the Bureau's preliminary findings that class actions 
provide significant monetary relief to consumers because they concluded 
that class action settlements provide, on average, small amounts of 
relief per consumer (what many commenters calculated as $32 per 
consumer as shown by the Study) and that, as a result, they provide no 
meaningful benefit to consumers. For several reasons, the Bureau does 
not agree that the fact that class actions sometimes provide a small 
amount of relief per consumer compels a finding that they do not 
provide significant relief to consumers in the aggregate or detracts 
from the Bureau's preliminary finding that class actions provide a more 
effective mechanism of securing relief than individual litigation or 
arbitration. The Bureau was not surprised to find average 
individualized monetary recoveries in class actions in such amounts, 
given that the class action procedure is designed to aggregate claims 
for small damages precisely because rational consumers do not spend the 
time or the money to litigate them on their own.
    First, in assessing the relevance of the small size of the average 
relief obtained, it is important to compare that to the alternative in 
which these consumers obtain no relief at all--because, as discussed 
above in Part VI.B.2, virtually none of them will pursue their 
individual claims. The Bureau finds that relief of $32 (or even $14, as 
some commenters suggest is a more accurate figure reflecting their 
attempts to exclude the overdraft settlements from the Bureau's data) 
is a better result for harmed consumers than no relief at all. As noted 
above, there were only about 25 disputes a year involving affirmative 
claims in arbitration by consumers for $1,000 or less.\524\ Second, 
companies are less likely to harm consumers when they face the threat 
of class action liability (this ``deterrent effect'' is discussed in 
more detail below at Part VI.C.1). While a single harm may be small, 
that amount of that harm (and the value of claims concerning that harm) 
multiplied by thousands or millions of consumers is substantial.\525\ 
Yet the single harm remains much less than the amounts for which 
consumers will choose to challenge or the amounts attorneys typically 
will take individual cases on contingency; as cited by industry 
commenters and discussed above, studies have shown that attorneys 
generally will not accept individual claims worth less than $60,000 on 
contingency.\526\
---------------------------------------------------------------------------

    \524\ Study, supra note 3, section 5 at 10. Similarly, few 
consumers filed claims in small claims court.
    \525\ This finding is no less true in cases concerning 
automobile loans for which the average relief is $337--that amount 
is likely still too small of an amount for a rational consumer to 
invest the time and expenses necessary to file an individual claim. 
In the automobile loan class action settlements analyzed in the 
Study, consumers received over $202 million in cash relief. Id. 
section 8 at 25 tbl 8.
    \526\ Hill, supra note 477, at 783. Indeed, no commenter 
suggested that attorneys would bring most of these smaller dollar 
value claims on an individual basis. Nor would it make economic 
sense for a consumer to pay a typical attorney's hourly rate to 
bring a small dollar claim.
---------------------------------------------------------------------------

    Further, the Bureau agrees with some consumer advocate commenters 
that stated that consumers who are unaware that they have been harmed 
nonetheless can benefit from a class action. For these reasons, the 
Bureau finds that consumers who fall victim to legally risky practices 
are better protected by receiving relatively small amounts from a class 
action settlement than being relegated to a system in which their only 
alternative is to pursue relief individually which, in practice, will 
result in most of them receiving nothing. This is especially true given 
that class members invest little (and in many cases none) of their own 
time or money to receive relief in a class action. The Bureau finds 
that the overall relief provided by class actions, coupled with the 
large number of consumers that receive payments as part of this relief, 
are the correct measure of their efficacy and that overall relief is 
not undermined by the fact that each of these individuals may receive 
relatively small monetary amounts.
    The Bureau also finds that commenters' comparison between the 
average payment to consumers in a class action (around $32) to the 
average individual consumer award in arbitration (around $5,000) is not 
apt. Many commenters have made this comparison to contend that 
consumers fare better in individual arbitration than in class 
litigation and, by extension, that class actions do not provide 
significant relief to consumers. This is an apples-to-oranges 
comparison. As discussed above, there is not much money at stake in the 
typical claim of a putative member of a class action, and thus there is 
little incentive for an individual to devote time and money to 
litigating the claim. In contrast, the Study found the average claim 
amount demanded in an arbitration to be $29,308, and the median to be 
$17,008.\527\ No commenters adduced evidence suggesting that the 
amounts at stake in most consumer class actions are even approaching 
this magnitude on a per consumer basis. Thus, arbitration claims are 
not the same magnitude as claims that are brought in class actions. Not 
surprisingly, the Study found that individual arbitration filings for 
amounts less than $1,000 were quite rare--only 25 per year. In other 
words, individuals rarely file claims in individual arbitration over 
small amounts, whereas class actions more often provide recovery to 
consumers for those claims.\528\ Thus, the disparity

[[Page 33267]]

between the recoveries of an individual consumer in class actions and 
those in individual arbitration is unsurprising.
---------------------------------------------------------------------------

    \527\ Study, supra note 3, appendix J at 62 tbl. 16.
    \528\ As noted above in Part VI.B.2, the Study showed that 
consumers rarely pursue low value claims in other fora, nor are many 
such claims resolved informally.
---------------------------------------------------------------------------

    With respect to the view asserted by an automobile industry 
commenter that class actions are not necessary for claims related to 
that industry because claims are typically for $1,000 or more, the 
Bureau does not find it to be supported that claims in that industry 
are typically for $1,000 or more (i.e., that small claims generally do 
not exist in that market). The commenter asserted that because the 
principal balance of an automobile loan is higher than the amount of 
credit extended for other consumer financial products and services, the 
frequency of small claims is therefore substantially reduced. The 
Bureau disagrees, however, that the principal balance of a loan is the 
primary indicator of the likelihood of small claims.\529\ Regardless of 
the size of the loan, claims can arise with respect to, for example the 
assessment of late fees or other ancillary fees, the application of 
individual payments, or the failure to provide required disclosures. 
Even claims of discriminatory pricing may not be for more than $100 on 
average, as has been true in certain enforcement actions the Bureau has 
brought involving automobile lending.
---------------------------------------------------------------------------

    \529\ Indeed, the Bureau notes that Congress has prohibited 
arbitration clauses in mortgages, where the typical size of the loan 
is much larger than the typical automobile loan.
---------------------------------------------------------------------------

    Furthermore, even if it were true that automobile loans claims are 
typically for $1,000, the Bureau does not believe that the existence of 
a $1,000 claim is sufficient incentive to encourage large numbers of 
consumers to file individual claims, for all of the reasons discussed 
above in Part VI.B.2, nor did the commenter cite evidence to the 
contrary. Indeed, multiple consumer lawyer and law firm commenters 
noted that it is economically unfeasible for them to represent 
consumers who have claims of this magnitude on an individual basis; 
such claims are only viable when they can be aggregated. For these 
reasons, the Bureau finds that the availability of class actions 
concerning automobile financing benefits consumers notwithstanding the 
possibility that the average claims amount in those cases in the Study 
may be higher than in some other markets.\530\
---------------------------------------------------------------------------

    \530\ With respect to the automobile dealer commenter that noted 
that dealers provide arbitration agreements to consumers as a 
separate document, the manner in which the arbitration agreement is 
provided to consumers is not relevant to the Bureau's findings that 
the class rule is for the protection of consumers or in the public 
interest. Indeed, for reasons discussed more fully in the Section 
1022(b)(2) Analysis below in Part VIII, consumer awareness of 
arbitration is not the market failure that this rule intends to 
address.
---------------------------------------------------------------------------

    Many industry and research center commenters criticized the 
efficacy of class actions because the settlements often require 
consumers to submit claims to obtain relief and consumers frequently do 
not do so. The Bureau disagrees that the low claims rate in claims-made 
settlements undermines the conclusion that significant relief is 
provided to consumers from class actions generally. Most of the 
commenters ignored the fact that in many consumer finance class 
actions, the company's records make it possible to identify the class 
members entitled to relief and the amount of relief to which they are 
entitled, thus obviating the need for a claims process. The Study 
identified 24 million consumers who received automatic payouts in the 
133 class settlements that identified the number of class members 
paid.\531\ Moreover, for the 251 settlements where the Bureau had data 
on the amount consumers were paid, the Study found as many cases that 
provided automatic relief as provided claims-made relief.\532\ In 
total, the Study found that consumers received $709 million through 
automatic payment settlements, $322 million by submitting claims, and 
another $63 million in cases involving both automatic and claims-made 
relief.\533\ No commenters disputed these amounts. The combined total 
of $1.1 billion in actual payments to consumers represents about half 
of the total $2.0 billion in cash relief awarded through the 
settlements analyzed. Further, the actual amounts paid to consumers 
from the settlements analyzed in the Study are almost certainly higher 
than what was reported because the Bureau was unable to obtain payments 
data for 79 of the 208 class settlements it analyzed that required 
consumers to make claims in order to receive monetary relief.\534\ 
Thus, the class settlements in the Study showed that a substantial 
portion of the relief awarded was paid, which is contrary to the 
suggestions of commenters that very little of the settlement amounts is 
delivered to consumers. Numerous comments from consumer advocates, 
nonprofits, public-interest consumer lawyers, and consumer lawyer and 
law firms confirmed this through their own experiences regarding class 
actions that provided substantial benefits to class members.
---------------------------------------------------------------------------

    \531\ Study, supra note 3, section 8 at 22 tbl. 6.
    \532\ Id. section 8 at 28 n.46.
    \533\ Id.
    \534\ Id. section 8 at 27. In addition, there were 56 class 
settlements that provided injunctive relief that covered 106 million 
class members (as well as future consumers who were not class 
members) regardless of whether they submitted a claim. Many of the 
class settlements that required consumers to submit a claim included 
such injunctive relief. Id. section 8 at 20-21 and tbl. 5.
---------------------------------------------------------------------------

    The Bureau acknowledges that, in the 105 class settlements analyzed 
in the Study requiring claims where there was data on the potential 
class size and claims rates, the unweighted average claims rate was 21 
percent and the weighted average was 4 percent. While these figures may 
understate the percentage of consumers actually eligible for relief who 
submitted claims (since the claims rate is sometimes calculated based 
on the number of potential members of a class, and since additional 
class members may have submitted claims after the Study's release), the 
figures do indicate that a large majority of consumers potentially 
entitled to claim relief from class actions do not file a claim when 
one is required.\535\ Nevertheless, the Bureau finds that, even taking 
into account the fact that many consumers do not file claims in class 
settlements that require them to do so, a system which enabled 4 
percent of consumers to obtain relief for small claims still would be 
more effective in providing redress than one in which the only 
alternative is for individuals to pursue their claims individually. 
Moreover, given the important role that automatic payment settlements 
play in consumer finance class actions, such actions can deliver relief 
to far more than 4 percent of class members. Simply stated, the over 
$200 million in relief provided per year on average to an average of 
almost 7 million consumers through a combination of automatic payments 
and claims made by consumers is significant relief to consumers.
---------------------------------------------------------------------------

    \535\ Id. section 8 at 5.
---------------------------------------------------------------------------

    With respect to the paper that commenters cited for the proposition 
that consumers receive only about 9 percent of the settlement amounts 
in class actions, the paper cited does not state the number of 
settlements that it analyzed that required consumers to submit claims 
as compared to the number of settlements that provided automatic 
relief, if any. Instead, the paper reached that 9 percent conclusion by 
estimating a 15 percent claims rate rather than through any substantive 
analysis.\536\ Indeed, the author stated

[[Page 33268]]

that she did not actually obtain the claims rates in the settlements 
analyzed (by contrast, the Bureau's Study did so). Thus, the Bureau 
does not believe that the author's 9 percent estimated figure is 
representative of consumer finance class actions overall because, as 
discussed above, consumer finance class actions are often particularly 
amenable to automatic payments.
---------------------------------------------------------------------------

    \536\ Shepherd, supra note 515, at 21. The author determined, 
based on citation to other studies, that claims rates are always 15 
percent or less. She then multiplied that by the 60 percent of total 
awards that go to consumers to reach the 9 percent conclusion.
---------------------------------------------------------------------------

    Further, the paper's author limited the settlements analyzed to a 
subset of class action cases under particular statutes the author 
classified as ``no-injury.'' \537\ As that paper acknowledges, there is 
no generally accepted definition of a ``no-injury'' case, and the 
Bureau does not agree, for reasons discussed below at Part VI.C.1 
discussing deterrence, with the characterization of claims under these 
statutes as ``no injury.'' \538\ In addition, the bulk of those cases 
involved claims under the FDCPA, TCPA, FCRA, and EFTA, each of which 
cover activity that extends beyond the scope of the Study and this 
rulemaking, to include claims involving nonfinancial goods or services 
that were not covered in the Study, that are not subject to the final 
rule, and that are more likely to involve claims-made settlements.\539\ 
For example, FCRA class actions can involve merchants and employers and 
thus would not be consumer financial in nature, while EFTA class 
actions in this period were often ATM ``sticker'' claims that no longer 
violate EFTA and, in any event, involve individuals who did not have 
contractual relationships with the provider and thus could not involve 
an arbitration agreement. As the proposal noted, and as finalized, the 
rule would have no impact on such cases. Similarly, FDCPA class actions 
cover collection of all types of debt, including debt that does not 
arise from a consumer financial product or service (such as taxes, 
penalties and fines), whereas the Study and the rule only cover 
collection of debt to the extent it is collection on a consumer 
financial product or service. Finally, TCPA class actions often involve 
marketing communications unrelated to consumer finance. Such claims are 
often brought against a merchant or a company with whom the consumer 
otherwise has no relationship, contractual or otherwise.\540\ It may 
well be that claims rates in TCPA cases could be low, perhaps in some 
part because there is no contractual relationship between the harmed 
consumer and the company and thus it is more difficult to reach those 
consumers.
---------------------------------------------------------------------------

    \537\ Shepherd, supra note 515, at 9.
    \538\ In any event, the Supreme Court's recent decision in 
Spokeo, Inc. v. Robbins reaffirmed that class members must have an 
actual injury. 136 S. Ct. 1540 (2016).
    \539\ Shepherd, supra note 515, at 2, 13.
    \540\ For example, a different study that analyzed TCPA filings 
in one Federal district court over two years found that 58 percent 
of the claims asserting violations of that statute related to 
unauthorized marketing faxes, calls, texts, or emails. Johnston, 
supra note 520 at 32.
---------------------------------------------------------------------------

    Many commenters pointed to the fact that in the Study, a small 
number of settlements--specifically, those that occurred as part of the 
Overdraft MDL litigation--accounted for a large portion of the relief 
obtained and a large portion of the consumers obtaining relief. The 
Bureau notes that, rather than indicating a problem with the Study, 
this simply reflects the fact that the distribution of class action 
settlement amounts is right-skewed. Such distributions are commonplace 
in business and finance: For instance, a small number of banks 
represent a large fraction of all depository accounts, and a relatively 
small proportion of individuals hold a majority of household 
wealth.\541\ Similarly, as shown in the Study, smaller settlements are 
more common than larger ones, even setting aside the overdraft 
settlements.\542\ Mathematically, the inevitable result of very small 
settlements being common and very large settlements being somewhat 
uncommon is that the large settlements will represent the bulk of the 
total dollars.
---------------------------------------------------------------------------

    \541\ E.g., Alina Comoreanu, ``Bank Market Share by Deposits and 
Assets,'' WalletHub (Feb. 9, 2017) (noting that the five largest 
depository banks, based on total assets, hold 47 percent of total 
bank assets in the United States); Congressional Budget Office, 
``Trends in Family Wealth, 1989 to 2013,'' (2016) (indicating that, 
in the United States, families in the top 10 percent of the wealth 
distribution held 76 percent of wealth); Bureau of Consumer Fin. 
Prot., ``Monthly Complaint Report: Vol. 21,'' (Mar. 2017) at 3, 10 
(indicating that complaints against the top 10 most-complained-about 
companies constituted about 30 percent of all complaints).
    \542\ Study, supra note 3, section 8 at 26 fig. 4.
---------------------------------------------------------------------------

    Insofar as these commenters have suggested that this makes the 
results observed in the Study unrepresentative of the benefits that 
class actions can provide in other time periods, the Bureau does not 
agree. The Bureau believes that the large overdraft settlements 
reflect, in part, that there was an industry-wide practice in a very 
large market that harmed many consumers. While class actions concerning 
such industry-wide practices may not occur every year, they do occur 
from time to time and can provide significant relief for 
consumers.\543\ Similarly, multidistrict litigations involving many 
millions of affected consumers come along regularly. And even class 
actions against a single institution can produce large numbers 
depending on the scope of the practice and customer base; for instance, 
one class action against a large bank whose employees routinely opened 
unauthorized accounts for existing customers recently reached a 
preliminary settlement of $142 million.\544\
---------------------------------------------------------------------------

    \543\ For example, between 2003 and 2006, 11 automobile lenders 
settled class action lawsuits alleging that the lenders' credit 
pricing policies had a disparate impact on minority borrowers under 
ECOA. Mark Cohen, ``Imperfect Competition in Auto Lending Subjective 
Markup, Racial Disparity, and Class Action Litigation,'' 1 R. L. 
Econ. 22, at 49 (2012) (noting that value of 11 settlements included 
$63 million in direct monetary benefits to consumers plus hundreds 
of millions of dollars more in savings to consumers from the 
companies' agreements as part of the settlement to restrict 
markups). Another example is a series of settlements concerning 
allegations that mortgage companies forced consumers to purchase 
unnecessary or excessive insurance that provided hundreds of 
millions of dollars in relief for consumers. See, e.g., Order 
Granting Final Approval to Class Action Settlement, Hall v. Bank of 
Am., N.A., No. 12-22700, 2014 WL 7184039 (S.D. Fla. Dec. 17, 2014) 
($228 million settlement); Order Granting Final Approval to Class 
Action Settlement, Diaz v. HSBC USA, N.A., No. 13-21104, 2014 WL 
5488161 (S.D. Fla. Oct. 29, 2014) ($32 million settlement); Order 
Granting Plaintiff's Motion for Final Approval of Class Action 
Settlement, Saccoccio v. JP Morgan Chase Bank, N.A., 297 FRD. 683 
(S.D. Fla. Feb. 28, 2014) ($300 million settlement); Stipulation and 
Settlement Agreement, Fladell v. Wells Fargo Bank, N.A., No. 13-
60721, 2014 WL 10017434, *1 (S.D. Fla. Mar. 17, 2014) ($19.5 million 
settlement); see also Order Granting Final Approval to Class Action 
Settlement, Lee v. Ocwen, et al., 2015 WL 5449813 (S.D. Fla 2015) 
(granting final approval to $140 million settlement with multiple 
defendants); Opinion and Order, Arnett v. Bank of Am., N.A., 2014 WL 
4672458 (D. Or. 2014) (granting final approval to $34 million 
settlement with one defendant).
    \544\ Motion and Memorandum in Support of Motion for Preliminary 
Approval of Class Action Settlement and for Certification of a 
Settlement Class, Jabbari v. Well Fargo & Co. et al., No. 15-2159 
(N.D. Cal. Apr. 20, 2017) ECF No. 111. As of the date of this Final 
Rule, the settlement has received preliminary approval by the 
district court in which the case is pending.
---------------------------------------------------------------------------

    The Bureau thus finds that the body of class actions, when taking 
into account their overall results, including both the large and small 
settlements, provides significant relief to consumers. Some commenters 
suggested that given the existence of the Bureau, in the future public 
enforcement can be expected to substitute for large class action 
settlements so that settlements of the magnitude of those that occurred 
in the Overdraft MDL litigation are unlikely to occur. However, an 
analysis of the complaints in the overdraft cases indicates that many 
of the claims were predicated on State law and on the terms of the 
consumers' contracts, and thus may not have been claims that the Bureau 
could have brought. Moreover, while it may seem easy, in hindsight, to 
identify ``big'' cases and assert that these are cases that public 
authorities like the

[[Page 33269]]

Bureau would have brought, the view in real time is far murkier. The 
Bureau certainly hopes that, given the resources available to it and 
the limitations on its enforcement authority, it will succeed in 
identifying instances in which large numbers of consumers are subject 
to harm and will seek and obtain redress. The Bureau acknowledges that, 
to the extent this occurs, the impact of the rule could be marginally 
reduced as consumers and class action attorneys might be less likely to 
pursue class actions with respect to that harm. However, as discussed 
further below in Part VI.B.5, given both resource and authorities 
constraints, the Bureau cannot be certain that it or other regulators 
can or will identify and redress all instances of large-scale consumer 
harm and thereby displace all large class action settlements.
    Moreover, even if it were appropriate to disregard the overdraft 
cases in assessing the Study's findings, the relief provided to 
consumers by the class action settlements analyzed in the Study that 
was unrelated to overdraft is itself significant. Indeed, the Study 
breaks out the relief provided to consumers through class settlements 
by product and that relief includes at least four large settlements of 
more than $50 million in markets other than checking and savings 
accounts (where the settlements concerning overdraft occurred).\545\ 
Setting aside all of the cash relief provided by cases related to 
checking and savings accounts, which includes cases beyond the 
overdraft cases, the payments actually made to consumers totaled $622.8 
million, or an average of overage $130 million per year.\546\ Many of 
these cases also resulted in significant behavioral relief as well.
---------------------------------------------------------------------------

    \545\ The settlements resulting in total payments to class 
members over $50 million were: Final Approval Order, In re Currency 
Conversion Fee Litigation, No. 01-01409 (S.D.N.Y. Sept. 17, 2008); 
Final Approval Order, Faloney v. Wachovia, No. 07-01455 (E.D. Pa. 
Jan. 22, 2009); Final Approval Order, Holman v. Student Loan Xpress, 
Inc., No. 08-00305 (M.D. Fla. Jan. 4, 2011); and Final Approval 
Order and Judgment, In re Chase Bank USA N.A. Check Loan Contract 
Litig., No. 09-02032 (N.D. Cal. Nov. 11, 2012). Study, supra note 3, 
section 8 at 28 n.47.
    \546\ Study, supra note 3, section 8 at 36 tbl. 13.
---------------------------------------------------------------------------

    Further, many of the settlements analyzed in the Study were for 
cases alleging violations of statutes for which the recovery in a 
single case is capped, such as the FDCPA which is capped at the smaller 
of $500,000 or 1 percent of the defendant's net worth.\547\ It is 
therefore not possible for there to be settlements of tens or hundreds 
of millions of dollars under the FDCPA, but the Bureau believes that 
those smaller settlements, in aggregate, continue to provide 
significant relief for consumers and deter wrongdoing by debt 
collectors. The Bureau finds consumers were eligible to receive and did 
receive substantial relief from class action settlements separate and 
apart from the overdraft settlements. Again, the Bureau received 
numerous comments from consumer lawyers and law firms, consumer 
advocates, and public-interest consumer lawyers regarding their own 
experiences within which companies provided substantial payouts to 
consumers. Most of these examples did not concern the overdraft cases, 
but nonetheless they all involved large sums provided to 
consumers.\548\
---------------------------------------------------------------------------

    \547\ 15 U.S.C. 1692k(a)(2)(B).
    \548\ See, e.g., Wells v. Chevy Chase Bank, 768 A. 2d 620 (Md. 
2001) ($16 million settlement for raising interest rates above 
advertised amount). Several commenters cited to an example, 
discussed in the Bureau's Preliminary Results, involving settlement 
of three cases against payday lenders in North Carolina. The three 
cases settled for $45 million, with payments sent to over 200,000 
consumers. Another commenter cited a $38.6 million settlement 
involving LVNV Funding. See Finch v. LVNV Funding, LLC, 71 A.3d 193 
(Md. Ct. Spec. App. 2013).
---------------------------------------------------------------------------

    As to commenters' criticisms of the Bureau's inclusion of the 
overdraft settlements in the Study because the Bureau did not attempt 
to assess the extent to which companies in those settlements provided 
informal relief to consumers, the Bureau did in fact address that issue 
in the Study and in the proposal, and discussed above in Part 
VI.B.2.\549\ In fact, as noted in the Study, the settlement amounts in 
those cases nearly all took into account the amount of informal relief 
that companies had provided to consumers prior to the settlement.\550\ 
More precisely, in 17 of the 18 Overdraft MDL settlements, the 
settlement amounts and class members were 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. 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.\551\ These results are consistent with the Bureau's more general 
concerns that, as discussed above at Part VI.B.2, consumers are often 
unable to pursue informal dispute resolution and, when they do, 
experience varying amounts of success.
---------------------------------------------------------------------------

    \549\ 81 FR 32830, 32850 (May 24, 2016).
    \550\ Study, supra note 3, section 8 at 45.
    \551\ Id. section 8 at 46 and n.63.
---------------------------------------------------------------------------

    With respect to the contention that consumers were not made better 
off by the overdraft settlements because the effect of the agreements 
to cease maximizing overdraft revenue through reordering drove up the 
price on all consumer checking accounts, the Bureau acknowledges that 
to the extent class actions succeed in curtailing unlawful practices 
that generate revenue for financial institutions, the institutions may 
respond by changing their pricing structures. Even if the effect of the 
overdraft litigation was to cause banks to substitute transparent, 
upfront fees on checking accounts for back-end fees paid by a small 
percentage of vulnerable consumers,\552\ the Bureau does not agree that 
it would follow that consumer welfare was unchanged or negatively 
impacted, especially since up-front fees are more likely to generate 
competition and shopping than more shrouded elements of pricing. In any 
event, the Bureau believes that consumers generally are made better off 
when companies follow the law even if in a particular case the effect 
of doing so is to eliminate a subsidy that one group of consumers is 
effectively providing to another. For this reason, too, the overdraft 
settlements made consumers better off in that those banks provided a 
remedy to consumers for the banks' violations of the law.
---------------------------------------------------------------------------

    \552\ The Bureau is not aware of any evidence demonstrating the 
extent to which the overdraft litigation had such an effect.
---------------------------------------------------------------------------

    Behavioral and In-Kind Relief in Class Actions. In addition to 
preliminarily finding that class actions were a relatively effective 
means for securing monetary relief for consumers victimized by unlawful 
practices, the Bureau also preliminarily found that class actions were 
effective as a means of providing other forms of relief as well. With 
respect to behavioral relief, the Study found that behavioral relief 
was provided for in about 13 percent of the settlements analyzed. That 
relief inures to the benefit of all consumers, whether the consumers 
were part of the settlement class or not. Further, as is discussed 
below in the Section 1022(b)(2) Analysis in Part VIII, the Study's 
definition of ``behavioral relief'' was quite narrow and referred 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.\553\ 
The Bureau did not count as behavioral relief a defendant's agreement 
simply to comply with the law, even though such a commitment often 
does, in fact, result in material changes in the company's

[[Page 33270]]

behavior.\554\ There were many class action settlements in which 
companies agreed to stop violating the law, behavior that inures to the 
benefit of all consumers, which are not reflected in the number of 
cases reporting behavioral relief in the Study.\555\ And neither type 
of behavioral relief was accounted for in the Study's monetary 
calculations.
---------------------------------------------------------------------------

    \553\ Study, supra note 3, section 8 at 4 n.7.
    \554\ Id. appendix S at 135.
    \555\ See, e.g., Settlement Agreement at 14, Murphy v. Capital 
One Bank, No. 08-00801 (N.D. Ill. Jan. 12, 2010) ECF No. 76-2 
(requiring defendant to continue to ``add[ ]to its periodic billing 
statements a message warning customers that, where appropriate, 
payment of the minimum payment due shown on their statement may not 
be sufficient to avoid an overlimit fee'' and to ``use its best 
efforts to maintain its policy for a period of not less than 
eighteen (18) months following the entry of the Final Judgment'') 
(cited at 81 FR 32830, 32932 (May 24, 2016); Settlement Agreement at 
13-14, Nobles v. MBNA Corp., No. 06-03723 (N.D. Cal. Dec. 5, 2008) 
ECF 179-3 (requiring defendant to continue to include language in 
credit agreements compliant with California law) (cited at 81 FR 
32830, 32932 (May 24, 2016)); Joint Motion for Preliminary Approval 
of Class Action Settlement at 3, Peterson v. Resurgent Capital 
Services L.P., No. 07-251 (N.D. Ind. Oct. 21, 2008) ECF 47 (``for 
all members of this class with a known address in Wisconsin, whose 
debt is time barred, Defendants will cease all efforts to collect 
the debt and not sell the debt'') (cited at 81 FR 32830, 32932 (May 
24, 2016)).
---------------------------------------------------------------------------

    No commenters took significant issue with any of these findings; to 
the extent that some industry commenters were dismissive of behavioral 
relief based on the Study's stating that it occurred in only 13 percent 
of cases, they appeared to overlook the fact that the Bureau was using 
a very narrow definition for this determination. Accordingly, in 
addition to cash relief provided, the Bureau finds that the behavioral 
relief--understood broadly--provided by class action settlements is a 
significant component of the relief provided to consumers. Indeed, as 
the Bureau noted in the proposal, the Bureau believes that this form of 
relief is often more meaningful to consumers than monetary recovery in 
individual class actions, an opinion echoed by several consumer 
advocate commenters. 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 affected by that practice--whether or 
not the consumer is in a particular class--benefits from the 
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. The Study found 53 class settlements in which defendants agreed 
to change their behavior to the benefit of at least the 106 million 
class members, including, for example agreeing to improve disclosures 
or stop charging certain fees.\556\
---------------------------------------------------------------------------

    \556\ Study, supra note 3, section 8 at 22 and appendix S at 
134.
---------------------------------------------------------------------------

    One example of this appears to have occurred with respect to 
overdraft practices. In Gutierrez v. Wells Fargo, the court ruled that 
the defendant bank's overdraft practices were illegal.\557\ Although 
that judgment was limited to a California class of the bank's 
consumers, the bank thereafter appears to have also changed its 
overdraft practices in other jurisdictions in the United States, 
presumably out of concern regarding other State's laws.\558\ Similarly, 
the Bureau bases this finding on its understanding of the important 
benefits 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 values of these behavioral changes are typically not 
quantified in case records, the Bureau believes, based on its 
experience and expertise, that their value to consumers is 
significant.\559\
---------------------------------------------------------------------------

    \557\ 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).
    \558\ 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.'').
    \559\ Relatedly, as is noted below in this part, the Overdraft 
MDL cases provide substantially more relief in perpetuity, to future 
customers not part of the class, than they did in cash settlements.
---------------------------------------------------------------------------

    With respect to commenters' criticisms of coupon settlements that 
they contended provide little tangible relief to consumers and to one 
commenter's criticism of a large settlement included in the Study, the 
Bureau notes that its analysis of class action settlements in the Study 
specifically separated such ``in-kind'' or ``coupon'' relief from cash 
relief and that the data discussed above regarding cash relief provided 
to consumers does not include the value of in-kind relief.\560\ Only 
slightly more than 2 percent of the class settlements analyzed in the 
Study provided for only in-kind relief (as opposed to cash relief by 
itself or in combination with other kinds of relief).\561\ Moreover, 
most of the examples cited by commenters of ``worthless'' coupon 
settlements are in cases that do not concern consumer financial 
products and thus are outside the scope of this rule, such as a case 
involving a ticket broker. As used in the Study, the term ``in-kind 
relief'' refers to class settlements in which consumers were provided 
with free or discounted access to a service, such as credit monitoring. 
The Bureau believes that in-kind relief can, in appropriate cases, 
provide additional benefits to class members. The Bureau valued such 
relief in the Study based upon the difference between the market price 
of a service given to class members and the price the class members 
were required to pay.\562\ The Bureau recognizes, that Congress, 
through CAFA, has provided for the courts to apply heightened scrutiny 
on in-kind relief, and the Bureau does not believe that such relief is, 
by itself, generally the primary benefit that consumers receive from 
class actions.\563\
---------------------------------------------------------------------------

    \560\ The cash relief provided by settlements analyzed in the 
Study was $1.1 billion. Study, supra note 3, section 8 at 29.
    \561\ Id. section 8 at 19.
    \562\ Id. section 8 at 4 n.6 and n.8. Most often, in-kind relief 
entailed free access to a service.
    \563\ See, e.g., Kara L. McCall, ``Coupon Settlements Play a 
Continuing Role in Class Litigation After CAFA,'' ABA Section of 
Litigation (2012), available at http://www.americanbar.org/content/dam/aba/administrative/litigation/materials/sac2013/sac_2013/46_buy_this_all_natural.authcheckdam.pdf.
---------------------------------------------------------------------------

    Proportion of cases filed as class actions that ultimately provide 
classwide relief. The Bureau has considered commenters' criticism that 
only a fraction of the cases brought as putative class actions reach a 
class settlement that provides relief for consumers in the class. While 
many of these commenters focused on the fact that the Study reported 
that 12 percent of the cases had resulted in class relief as of 2012, 
the proposal reported that the percentage of cases in which a final 
class settlement was approved or pending approval had increased to 18.1 
percent as of April 2016.\564\ Approximately 60 percent of the putative 
class actions analyzed either were settled on an individual basis or 
resolved in a manner consistent with an individual settlement.
---------------------------------------------------------------------------

    \564\ 81 FR 32830, 32847 (May 24, 2016).
---------------------------------------------------------------------------

    The Bureau believes, as it stated in the proposal, that the best 
measure of the effectiveness of class actions for all consumers is the 
absolute relief they provide in light of the number of

[[Page 33271]]

consumers who receive this relief, and not the proportion of putative 
class cases that result in other outcomes. 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 in court or arbitration, including by filing their own class 
actions. 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 number of consumers who obtain relief and the magnitude of relief 
that these cases collectively (including the many that do result in 
class settlements) deliver to consumers.\565\ Thus, even if, as one 
commenter noted, the likelihood that any case filed as a putative class 
action results in actual cash relief to a consumer is low, the amount 
ultimately provided in those cases that do is large enough to compel a 
finding that class actions provide significant relief to consumers.
---------------------------------------------------------------------------

    \565\ Stakeholders similarly asserted that class actions were 
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.
---------------------------------------------------------------------------

    The Bureau acknowledges that when a case is filed as a putative 
class action and settled individually, the defendant may incur higher 
defense costs than if the case had been filed individually. Further, 
while the purpose of the class rule is to preserve the ability for 
there to be class mechanisms to compensate consumers when they are 
harmed, the prospect of which deters companies from further harming 
consumers as discussed in more detail below in Part VI.C.1, the Bureau 
agrees that the putative class cases that do not end in class 
settlement may not themselves further this purpose. Nevertheless, it 
would not be possible for a rule to allow the filing of only such cases 
that would ultimately end in class settlement or favorable judgments 
for consumers because the purpose of litigation is to sort such 
outcomes. Accordingly, while the Bureau considers the prevalence of 
these outcomes and the cost of defending these cases further below in 
discussing whether the proposed rule is for the benefit of consumers 
and in the public interest (and in its Section 1022(b)(2) Analysis 
below in Part VIII as well), it does not believe these outcomes detract 
from the Bureau's finding that class actions provide an effective means 
of providing consumer relief.
    Many of the commenters also suggested that the high proportion of 
putative class cases that resulted in individual settlements or 
potential individual settlements (around 60 percent) demonstrates that 
the underlying claims were not meritorious. Even if that were true, it 
still would not suggest that the class action mechanism as a whole is 
ineffective as a means of redressing harm to consumers for the reasons 
discussed above. But the Bureau also notes that there is no way to know 
with certainty whether the putative class cases settled on an 
individual basis had merit or involved potentially classable claims; 
the commenters did not provide evidence to support their assertions 
that those cases are, on the whole, meritless. Settlement between 
parties to a lawsuit is an everyday occurrence. Parties may choose to 
settle a putative class case on an individual basis for any number of 
reasons, such as because the defendant threatened to move the case to 
arbitration or offered the named plaintiff full relief on his or her 
individual claim, which a company may do in litigation in an effort to 
avoid defense costs or to avoid providing broader relief to other 
affected consumers. Indeed, there are numerous factors that go into any 
defendant's decision to settle, including the legal framework of the 
claims asserted, the facts underlying the allegations, and the costs of 
defense. When a consumer files an action in court alleging the 
consumer's individual claims affect a class of other consumers, the 
rules of civil procedure generally allow that consumer to conclude the 
action by resolving their individual claims before a court certifies 
the case is a class action. Sometimes, a consumer who has filed a 
putative class action may be unwilling to pursue that case if the 
company decides to make the consumer whole, while in other cases, the 
law may not have allowed the class claims to proceed if the company 
offered full relief to the named plaintiffs.\566\ This outcome is 
available at the election of the parties and generally not subject to 
approval by the court. Therefore, the Bureau does not agree that there 
is a valid basis to draw inferences about the quality of the claims 
alleged in these cases based solely on how the parties chose, as a 
voluntary matter, to resolve them.
---------------------------------------------------------------------------

    \566\ During the period covered by the Study which analyzed 
cases filed in the years 2010 through 2012, a majority of Federal 
circuits had held that an offer of judgment to the named plaintiff 
renders a class action moot. Diaz v. First American Home Buyers 
Protection Corp., 732 F.3d 948, 953 n.5 (9th Cir. 2013) (citing 
precedent in six Federal appellate circuits under which offers of 
complete relief were held to moot a class action). The Supreme Court 
recently held, however, that an unaccepted settlement offer to the 
named plaintiff does not render a class action moot. Campbell-Ewald 
Co. v. Gomez, 136 S. Ct. 663, 670 (Jan. 20, 2016) Study, supra note 
3, section 6 at 46 tbl. 7.
---------------------------------------------------------------------------

    In addition, the Bureau finds that individual settlements in 
putative class cases, when they occur, typically occur relatively early 
in the class action process. The Study's data on time to resolution of 
putative class cases suggested that defense costs are likely much lower 
for putative class cases that result in individual settlement than for 
a putative class case that reaches classwide settlement. The Study 
obtained information on the amount of time to resolution for the cases 
it analyzed and the Bureau expects that a company's defense costs 
likely increase as the time to resolution of the case increases. This 
data showed that the median number of days to close for a case filed as 
a class case but that resulted in a known individual settlement was 193 
days; for such a case that resulted in a potential individual 
settlement, the median days to close was 130 days.\567\ In contrast, 
the median number of days to close when a case was settled on a 
classwide basis was 670 days.\568\ In other words, cases filed as class 
actions that settled on a classwide basis typically closed more than a 
year after similar cases that resulted in an individual settlement or a 
potential individual settlement. These cases settled on an individual 
basis therefore involved less litigation and thus likely lower defense 
costs. The relevance of these findings is discussed further below in 
Part VI.C.2 in the discussion of whether the class rule is in the 
public interest.
---------------------------------------------------------------------------

    \567\ Id.
    \568\ Id.
---------------------------------------------------------------------------

    Merits of Claims Resolved by Class Actions. With respect to 
commenters that contend that class action settlements do not benefit 
consumers because they often occur in cases where the defendant may 
have agreed to settle the case but did not actually violate the law or 
where the claims were frivolous, the Bureau does not dispute that there 
is some pressure to settle contested matters of all kinds, whether 
individual

[[Page 33272]]

suits or class actions, to avoid defense costs or the risk of a 
judgment. Nevertheless, the Bureau does not agree that the existence of 
this pressure means that a settlement has no correlation with merit or 
violations of the law. To the contrary, a defendant's assessment of the 
merits of the plaintiff's claim--specifically, the plaintiff's 
likelihood of succeeding at trial--is a key factor influencing a 
defendant's decision to settle.\569\ The central role that the merits 
of a plaintiff's claim plays in this framework is reflected in the fact 
that it is among the primary factors courts assess when reviewing 
proposed class settlements.\570\
---------------------------------------------------------------------------

    \569\ Key factors affecting the expected cost of litigation, and 
thus a defendant's settlement amount, include the exposure to the 
class, the plaintiff's likelihood of success at trial (a reasonable 
proxy for the merits of the plaintiff's claim), and the defendant's 
litigation costs. E.g., Richard A. Posner, ``An Economic Approach to 
Legal Procedure and Judicial Administration,'' 2 J. Legal Stud. 399, 
at 418 (1973); Jennifer K. Robbennolt, ``Litigation and Settlement, 
in The Oxford Handbook of Behavioral Economics and the Law,'' at 623 
(Eyal Zamir and Doron Teichman, eds. 2014).
    \570\ E.g., 7A Charles Alan Wright & Arthur R. Miller, ``Federal 
Practice and Procedure: Civil Sec.  1797.1'' at 82-88 (3d ed. 2002) 
(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''); 
Federal Judicial Center, ``Manual for Complex Litigation,'' at Sec.  
21.62 (4th ed. 2004) (listing ``the advantages of the proposed 
settlement versus the probable outcome of a trial on the merits'' as 
a factor that may bear on review of a settlement). See also 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''); 
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''); Schneider v. Citicorp Mortgage, 
Inc., 324 F. Supp. 2d 372, 376 (E.D.N.Y. 2004) (``[W]hen considering 
whether to approve a proposed class action settlement, `the most 
important factor is the strength of the case for plaintiffs on the 
merits, balanced against the amount offered in settlement.'''), 
citing City of Detroit v. Grinnell Corp., 495 F.2d 448, 455 (2d Cir. 
1974); In re Microsoft Corp. Antitrust Litig., 185 F. Supp. 2d 519, 
526-27 (D. Md. 2002) (denying approval of proposed class settlement 
in part because record was not ``sufficiently developed on various 
damages issues'' or the probability of plaintiff's success at 
trial); Lachance v. Harrington, 965 F. Supp. 630 (E.D. Pa. 1997) 
(approving proposed class settlement where parties adequately 
estimated outcomes and risks of trial as well as value of settlement 
to proposed class members).
---------------------------------------------------------------------------

    Further, the Study showed that certification in a class case almost 
invariably occurs coincident with a settlement, and thus that 
certification 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. Such motions provide some evidence as 
to the merit of the legal theories underlying the complaint and, in the 
case of summary judgment motions, of the factual allegations as well. 
In particular, court decisions granting such motions would suggest that 
the claims lack merit. Yet the data show that courts grant dispositive 
motions relatively infrequently, indicating that they rarely find that 
these cases are devoid of legal merit as pled.\571\
---------------------------------------------------------------------------

    \571\ The Bureau acknowledges, as some commenters suggested, 
that survival of a dispositive motion is not always indicative of 
the merits of the underlying claim, given that courts typically take 
allegations as true (in reviewing a motion to dismiss) or most 
favorably to the non-movant (in reviewing a summary judgment 
motion). Nevertheless, if most class actions truly were devoid of 
any merit as many commenters suggested they are, the Bureau would 
have expected defendants to succeed more often in defeating such 
claims before entering into a settlement.
---------------------------------------------------------------------------

    The Study analyzed these data in two different case sets: Class 
action filings in State and Federal courts in six consumer finance 
markets, and cases with Federal class action settlements across 
consumer finance markets more generally. Among class action filings in 
the six markets, the Study found that companies filed dispositive 
motions in 37.9 percent of the 562 cases analyzed, and that courts 
granted such a dispositive motion and dismissed at least one company 
party entirely from the case in only 10 percent of the same cases.\572\ 
Among Federal class action settlements analyzed in the Study, 40.3 
percent were approved by courts only after a defendant filed 
dispositive motions and the court denied at least one such motion.\573\ 
In short, in both case sets, the Bureau found that companies regularly 
sought to challenge the legal or factual basis for claims asserted in 
the litigation, and that courts infrequently granted these challenges. 
The Bureau does not believe that the Study's finding that few class 
cases conclude with a court granting a defendant's dispositive motions 
or a trial verdict in favor of the plaintiff is consistent with a lack 
of merit in the underlying allegations.\574\
---------------------------------------------------------------------------

    \572\ Study, supra note 3, section 6 at 38 n.68.
    \573\ Id. section 8 at 38-39.
    \574\ While trial verdicts in consumer financial class action 
cases are rare, they do occur. A bench trial in Gutierrez v. Wells 
Fargo Bank, N.A., led to a judgment on the merits in favor of the 
plaintiff class. 730 F. Supp. 2d 1080, 1082 (N.D. Cal. 2010). This 
case was not included in the Study's analysis of consumer financial 
litigation in court because it was filed in 2007 and the Study 
analyzed cases filed from 2010 through 2012. Study, supra note 3, 
section 6.
---------------------------------------------------------------------------

    With respect to commenters that hypothesized that defendants could 
nevertheless agree to enter into a class action settlement after 
winning a dispositive motion, the Bureau notes that these commenters 
cited no examples, and this did not happen in the class action filings 
analyzed in the Study.\575\ Regardless, if a defendant settles on a 
classwide basis after winning a motion to dismiss, the Bureau believes 
that the settlement amount is likely to be lower than it would have 
been if the defendant had lost the motion to dismiss.\576\ This is 
because among the factors a court considers in reviewing a settlement 
is likelihood of success on the merits, and if the court has already 
found a claim to lack merit, that will naturally affect its view of the 
likelihood of success of such a claim on appeal.\577\
---------------------------------------------------------------------------

    \575\ See id. at appendix O.
    \576\ See J. Maria Glover, The Federal Rules of Civil 
Settlement, 87 N.Y.U. L. Rev. 1713, at 1730-31 (2012) (``In general, 
access to discovery is granted without limitation once a motion to 
dismiss is denied, enabling claimants to impose significant, 
asymmetric production costs on the opposing party. . . . 
Accordingly, a claimant will obtain a `motion to dismiss premium' in 
proportion to any temporal or absolute asymmetrical cost imposition 
in the discovery stage.'').
    \577\ See, e.g., Shane Group, Inc. v. Blue Cross Blue Shield of 
Michigan, 825 F.3d 299, 309 (6th Cir. 2016) (``[T]he district court 
must specifically examine what the unnamed class members would give 
up in the proposed settlement, and then explain why--given their 
likelihood of success on the merits--the tradeoff embodied in the 
settlement is fair to unnamed members of the class.''); In the 
Matter of Synthroid Marketing Litigation, 264 F.3d 712, 716 (7th 
Cir. 2001) (determining that a settlement ``is generous in light of 
the difficulties facing the class'' in proving their case on the 
merits); TBK Partners, Ltd. v. Western Union Corp., 675 F.2d 456, 
464 (2d Cir. 1982) (``[I]n light of the substantial risks inherent 
in further litigation and the limited potential amount of a possible 
successful recovery, we find no reason to overturn the District 
Court's evaluation of the settlement as manifestly reasonable.'').
---------------------------------------------------------------------------

    Given the mechanisms within the litigation process for testing the 
relative merit of allegations short of trial, the Bureau does not agree 
with commenters that suggested that the dearth of trials in class 
action cases suggests that the merit of these cases go untested.\578\ 
As discussed, short of verdicts, courts have and use mechanisms to test 
the merit of and dispose of claims that cannot succeed as pled. Courts 
dismiss claims that fail to state a plausible claim for relief \579\ 
and can sanction attorneys that

[[Page 33273]]

file frivolous claims without evidentiary support for the 
allegations.\580\ In addition, Congress, through amendments to the 
Federal Rules of Civil Procedure and enactment of CAFA, has and 
continues to consider further adjustments to class action 
procedures.\581\ The Supreme Court has also rendered a series of 
decisions making clear that Federal Rule 23 ``does not set forth a mere 
pleading standard'' and establishing a number of requirements to 
subject putative class claims to close scrutiny.\582\ Thus as noted 
above in Part II.B, the law expects courts to act to limit frivolous 
litigation. Further, the Bureau understands that class action attorneys 
will typically earn nothing for the time invested in developing, 
filing, and litigating a class case that is dismissed on a dispositive 
motion. The Bureau believes this may serve as an incentive not to bring 
cases that would be dismissed for lacking merit.
---------------------------------------------------------------------------

    \578\ The Bureau notes that one consumer lawyer commenter stated 
that he had been involved in multiple class actions that reached a 
verdict in favor of the class.
    \579\ Fed. R. Civ. P. 12(b)(6). See also Bell Atlantic Corp. v. 
Twombly, 550 U.S. 544 (2007), and Ashcroft v. Iqbal, 556 U.S. 662 
(2009) (both elaborating on the requirement that a complaint must 
dismissed if it does not state a claim upon which relief can be 
granted).
    \580\ Fed. R. Civ. P. 11.
    \581\ See, e.g., Class Action Fairness Act (CAFA), Public Law 
109-2, 119 Stat 4 (2005); Fairness in Class Action Litigation Act, 
H.R. 985, 115th Cong. (2017); Fairness in Class Action Litigation 
and Furthering Asbestos Claim Transparency Act of 2016, H.R. 1927, 
114th Cong. (2016); State of Class Actions Ten Years After the 
Enactment of the Class Action Fairness Act, Hearing before the H. 
Comm. on the Judiciary, 113th Cong. 114-10 (2015);
    \582\ See, e.g., Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338, 
350 (2011).
---------------------------------------------------------------------------

    With respect to Tribal commenters that asserted that frivolous 
class action settlements threaten Tribal treasuries, the Bureau notes 
that Tribal governments are generally immune from private lawsuits and 
therefore that class actions should not affect their Tribal coffers, as 
discussed in detail below in the section-by-section analysis of Sec.  
1040.3(b)(2) in Part VII. Further, the Bureau clarifies in Sec.  
1040.3(b)(2) of this Final Rule that any Tribal government or an arm of 
such government that is immune from private suit is exempt from the 
class rule.
    Other Concerns Regarding Class Actions. With respect to comments 
that criticized the value to consumers of class action settlements 
because they proceed slowly and it takes a long time for consumers to 
obtain relief, the Bureau recognizes that class actions can proceed 
slowly. As discussed above in this Part VI.B.3 with respect to the 
monetary relief provided by class actions, however, the Bureau believes 
that most consumers who obtain relief in class actions likely would not 
have pursued relief through other individual litigation or arbitration. 
For this reason, the Bureau finds that the relief provided to these 
consumers through class actions, even if slow to arrive, benefits these 
consumers relative to a system which proceeds faster but only handles 
individual cases and thus provides relief to few consumers. In an 
economic sense, if a consumer receives $32 three years from now, 
instead of immediately, the present value of the later income may be 
about $8 less (approximately $24), but it is more than zero.\583\ 
Similarly, the Bureau does not believe that it is instructive to 
compare the duration of an individual arbitration proceeding to the 
duration of a class action case that ends in a settlement. Very few 
individuals pursue claims in individual arbitration, and those who do 
typically do so because they have a claim worth a significant amount of 
money. As commenters seem to agree, those claims are not the types of 
claims typically redressed in a class action. In addition, as one 
consumer advocate suggested, if all consumers harmed by a provider's 
widespread practice actually did bring their claims individually, or if 
even a significant portion of them did, the time and expense for 
consumers and providers alike would likely far exceed what would occur 
if the claims could be addressed in a single class action.
---------------------------------------------------------------------------

    \583\ For example, assuming a 10 percent discount rate, net 
present value of $32 drops to $24 in three years. By contrast, the 
value of a company's agreement to change its behavior does not 
diminish over time and may increase.
---------------------------------------------------------------------------

    With respect to one industry commenter's argument that each class 
action lawsuit should be counted as one filing (despite covering claims 
of many consumers) and compared to single individual filings in either 
litigation or arbitration, the Bureau disagrees that that is the 
relevant comparison. Instead, the Bureau maintains that because there 
are thousands or even millions of consumers who benefit from class 
action settlements, the relevant comparison when analyzing individual 
and class action suits is the number of consumers who ultimately 
benefit from the suit, rather than the number of consumers who file the 
suit.
    For these reasons, the Bureau finds that the class action mechanism 
is a more effective means of providing relief for violations of law or 
contract affecting groups of consumers than other mechanisms available 
to consumers, such as individual formal adjudication (either in court 
or arbitration) or informal efforts to resolve disputes.
4. Arbitration Agreements Block Some Class Action Claims and Suppress 
the Filing of Others
    In the proposal, the Bureau made a number of preliminary findings 
regarding the impact that arbitration agreements have on consumers and, 
in particular, consumers' ability to pursue relief on a classwide 
basis. Specifically, the Bureau preliminarily found, based upon the 
Study, that arbitration agreements are frequently used by providers of 
consumer financial products and services, that the agreements have the 
effect of blocking a significant portion of class action claims that 
are filed. Indeed, the Study found nearly 100 putative class action 
cases that were blocked by arbitration agreements.\584\ The Bureau 
further preliminarily found that consumers rarely filed claims on an 
individual basis once a class action was blocked by an arbitration 
agreement, citing to the Study. The Bureau further cited to its case 
study of opt-outs from settlements in the Preliminary Results of the 
Study further demonstrates that consumers who opt of receiving cash 
relief in a class settlement rarely take the opportunity to file a 
claim in arbitration.
---------------------------------------------------------------------------

    \584\ Study, supra note 3, section 6 at 7.
---------------------------------------------------------------------------

    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.\585\
---------------------------------------------------------------------------

    \585\ See id. section 6 at 57-58.
---------------------------------------------------------------------------

    The Bureau also preliminarily found that the existence of 
arbitration agreements suppresses the filing of class action claims in 
the first place, citing in support of this proposition a survey of 
consumer lawyers who had declined to file class cases concerning 
products covered by an arbitration agreement.\586\
---------------------------------------------------------------------------

    \586\ 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.
---------------------------------------------------------------------------

Comments Received
    Frequency of use of arbitration agreements to block class actions. 
Several industry commenters disagreed that arbitration agreements are 
frequently used to block class actions. One such commenter noted that 
in the 562 Federal class actions analyzed by the Study, companies filed 
motions to compel in only 17 percent of the cases and those motions 
were successful in only 8 percent of the 562 cases. Accordingly, this 
commenter suggested that arbitration agreements were not widely used to 
block class actions and that few class actions were actually blocked. 
The same industry commenter noted that the Study showed that 
arbitration agreements were used rarely

[[Page 33274]]

to block individual cases--motions to compel arbitration were filed in 
only 1 percent of the 1,200 individual Federal cases analyzed. This 
commenter disputed the Bureau's assertion that there were ``large'' 
numbers of individuals in the putative classes that were compelled to 
arbitration on the basis of arbitration agreements because there was no 
way to know class size if the case was not certified before the motion 
to compel was granted.
    On the other hand, consumer advocates, public-interest consumer 
lawyers, consumer lawyers and law firms, and several nonprofits 
asserted that arbitration clauses frequently block and chill the filing 
of class action cases. In many instances, commenters proffered examples 
from their personal experiences. For example, one consumer law firm 
commenter provided two examples of class actions that could not proceed 
due to the existence of an arbitration agreement--one case was 
voluntarily dismissed (and thus would not be counted in the Bureau's 
Study) and one in which arbitration was compelled upon appeal. Another 
stated that he had turned away over 100 cases involving arbitration 
agreements. A different consumer lawyer contrasted her experience with 
a series of automobile finance class actions involving what she 
characterized as plainly unlawful behavior; the commenter noted three 
cases that defendants had successfully blocked by invoking an 
arbitration agreement and contrasted those to others in which she had 
successfully recovered damages for a class where there was no 
arbitration agreement. Another consumer law firm commenter stated that 
it had turned away 27 cases in the prior year because it lacked the 
resources to try each of these cases individually, although it would 
have had the resources and an interest in pursuing them as class 
actions if there had not been arbitration agreements prohibiting class 
proceedings. Several public-interest consumer lawyer commenters said 
that one of the first questions they ask is whether consumers have 
disputes that may be governed by arbitration agreements and, if so, 
that they turn down those clients.
    A group of Congressional commenters cited the example of a large 
bank whose employees opened millions of unauthorized accounts in the 
names of the bank's existing customers over a period of years. The bank 
successfully used arbitration agreements in its agreements with 
customers for the authorized accounts to block lawsuits by customer's 
asserting violations of the law with respect to the unauthorized 
accounts.\587\ In the view of these Congressional commenters, the 
bank's use of arbitration agreements to block those lawsuits allowed 
the bank to continue its illegal practices for significantly longer 
than it would have been able to had the lawsuits been allowed to 
proceed in court when they were filed. One public-interest consumer 
lawyer commenter noted several instances in which companies have said 
informally to him that they maintained arbitration agreements in order 
to block class actions.
---------------------------------------------------------------------------

    \587\ E.g., Douglas v. Wells Fargo, BC521016 (Ca. Super. Ct. 
2013); Jabbari v. Wells Fargo, (N.D. Cal. 2015).
---------------------------------------------------------------------------

    Pursuit of individual claims after class actions blocked. Some 
industry commenters further challenged the Bureau's preliminary finding 
that consumers rarely pursued a claim on an individual basis after a 
putative class claim was dismissed or stayed on the basis of an 
arbitration agreement. For example, one industry commenter challenged 
findings in a case study presented in the Bureau's Preliminary Results 
indicating that only three of the 3,605 individuals who opted out of 
class action settlements analyzed (comprising approximately 13 million 
consumers) filed individual claims in AAA arbitration. The commenter 
contended that the Bureau's data is too limited to support its 
conclusion because the consumers who opted out could have filed 
individual claims with JAMS or in court, but the Bureau had data only 
concerning AAA arbitrations.
    Several consumer advocates, nonprofits, and consumer law firms and 
lawyers agreed with the Bureau's finding. Specifically, one consumer 
lawyer stated that in his experience individual claims are never filed 
when class claims are stayed or dismissed. Two public-interest consumer 
lawyer commenters explained that, in most cases, only the named 
plaintiff even knows that a claim exists, and even that individual 
might not have an incentive to pursue the claim in arbitration if there 
is no promise of benefitting others who are similarly situated given 
the relative size of the claim and the costs of pursuing it further.
    Suppression of claims. With respect to the Bureau's preliminary 
finding that arbitration agreements suppress the filing of class 
claims, several industry commenters stated that the survey of consumer 
lawyers on which the Bureau relied to support this conclusion is flawed 
because it did not examine whether a case turned down by one attorney 
was later filed by another nor does it purport to show the total number 
of cases not filed. Other consumer lawyer and law firm commenters 
disagreed, asserting that the survey was accurate and, as noted above, 
in accordance with their own experiences. Specifically, consumer 
lawyers and law firms stated in their comments examples from their own 
experiences of not bringing cases due to the existence of an 
arbitration agreement that a defendant could use to block the case from 
proceeding. For example, one consumer lawyer explained how, after a 
case where it was apparent that his fee would take a large portion of 
his client's potential recovery, he concluded that it was economically 
impossible for him to continue to handle such individual cases and thus 
decided to no longer take them at all.
Response to Comments and Findings
    Frequency of use of arbitration agreements to block class actions. 
As noted above in Part III.D.1, 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 an arbitration agreement, a 
defendant can seek a dismissal or stay of the litigation in favor of 
arbitration.\588\ If the court grants such a dismissal or stay in favor 
of arbitration, the class case could potentially be refiled as a class 
arbitration.\589\ 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.\590\ The Study did not identify any 
contracts with arbitration agreements that explicitly permitted class 
arbitration, nor did any commenters indicate that such agreements 
exist. 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

[[Page 33275]]

applies. No commenters disagreed with any of the Bureau's findings in 
this regard.
---------------------------------------------------------------------------

    \588\ See Concepcion, 563 U.S. 333 (2011).
    \589\ 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 3, section 5 at 
86-87.
    \590\ Id. section 2 at 44-46.
---------------------------------------------------------------------------

    As set out above in Part II.C, the public filings of some companies 
confirmed that the effect--indeed, often the purpose--of arbitration 
agreements is to allow companies to shield themselves from class 
liability.\591\ Further, companies have stated both to the Bureau and 
in public news reports after the proposal was released, that they 
adopted arbitration agreements for the primary purpose of blocking 
private class action filings.\592\ Commenters did not dispute this. 
Indeed, many industry commenters stated that the class action waiver is 
integral to their offering of individual arbitration; they asserted 
that the cost of arbitrating individual claims is too great to bear 
when they must also defend class action litigation. (This argument is 
addressed below in Part VI.C.1.)
---------------------------------------------------------------------------

    \591\ See Discover Financial (Form 10-K), supra note 95.
    \592\ See SBREFA Report, supra note 419, at 16-17; see also 
James Rufus Koren, ``Agency Targets Ban on Class Actions,'' L.A. 
Times (May 5, 2016) (`` `What made arbitration clauses attractive 
was their impact on class-action litigation,' [financial services 
attorney Alan Kaplinsky] said. `Most banks and companies using it 
now will conclude it's no longer worth it.' ''); Kate Berry, 
``CFPB's Arbitration Plan Delivers Sharp Blow to Financial 
Industry,'' American Banker (May 5, 2016) (``For 30 years, financial 
institutions have used arbitration agreements with so-called class-
action waivers to effectively prevent consumers from banding 
together in class actions to pursue similar claims. `Under the 
CFPB's proposal, that shield would no longer be available,' said 
Walter Zalenski, a partner at the law firm BuckleySandler.'').
---------------------------------------------------------------------------

    The Study showed that defendants were not reluctant to invoke 
arbitration agreements to block putative class actions and were 
successful in many cases.\593\ With respect to industry comments that 
suggested that arbitration agreements were not widely used to block 
class actions because companies filed motions to compel arbitration in 
only 16.7 percent of the class cases analyzed in the Study, the 16.7 
percent figure is correct but reflects only one of two data sources in 
the Study on motions to compel arbitration. The Study cited 92 cases 
out of 562 putative class cases analyzed in Section 6 of the Study in 
which motions to compel arbitration were filed (16.7 percent) and in 46 
of those cases, the motions were granted and the case was dismissed or 
stayed. The Study also found an additional 50 putative class cases that 
were filed outside of the period analyzed in the Bureau's review of 
filings in court and were dismissed on the basis of an arbitration 
agreement.\594\ Thus, over a period of approximately five years, nearly 
100 Federal and State putative consumer class actions were dismissed or 
stayed because companies invoked arbitration agreements in motions to 
compel arbitration.\595\ While it is true, as one industry commenter 
noted, that every putative class case blocked by an arbitration 
agreement might not have been certified or ultimately provided relief 
to any consumers, it is reasonable to expect that at least some of 
those 100 cases would have done so. Because one settled class action 
case can provide relief to many consumers, the Bureau finds that 
arbitration agreements blocking nearly 100 putative class cases 
indicates that use of arbitration agreements affects large numbers of 
consumers.
---------------------------------------------------------------------------

    \593\ Study, supra note 3, section 6 at 57.
    \594\ These putative class cases pertained to consumer financial 
products or services (including more than the initial six markets 
studied) and were dismissed pursuant to a motion to compel 
arbitration that cited the Concepcion case. Id. section 6 at 58-59.
    \595\ In any event, if the commenters that argued that 
arbitration agreements are not actually used to block class actions 
were correct, then it seems unlikely that industry commenters would 
so uniformly oppose the likely result of this rule--additional class 
actions filed against providers that will result in settlements.
---------------------------------------------------------------------------

    As just one example, the Bureau notes that in the matter discussed 
above in Part VI.B.3 involving a large bank that opened unauthorized 
accounts on behalf of millions of customers in violation of the law, 
that bank relied on arbitration agreements in its contracts with 
customers for the authorized accounts to block many of those customers 
from pursuing classwide relief in court with respect to the 
unauthorized accounts. Plaintiffs filed two putative class action 
lawsuits in 2015 against the bank for opening unauthorized accounts, 
and both lawsuits were later dismissed in response to the bank's 
motions pursuant to its arbitration agreements.\596\ Because those 
lawsuits were blocked, those consumers were not able to pursue relief 
in court for the bank's violations of the law. The parties in the 
latter case later agreed voluntarily to withdraw an appeal of the 
arbitration dismissal and have recently come to agreement on a proposed 
class settlement, nearly two years after the class action was first 
filed.\597\
---------------------------------------------------------------------------

    \596\ Jabbari v. Wells Fargo, (N.D. Cal. 2015); Heffelfinger v. 
Wells Fargo., (N.D. Cal. 2015). Individuals filed at least two 
lawsuits in California State court in 2013 against the bank for 
opening unauthorized accounts, and both lawsuits were dismissed or 
stayed on the basis of arbitration agreements; one ultimately 
settled and the other was withdrawn, indicating a possible non-class 
settlement. Douglas v. Wells Fargo, BC521016 (Ca. Super. Ct. 2013); 
Mokhtari v. Wells Fargo, BC530202, (CA. Super Ct. 2013).
    \597\ Motion and Memorandum in Support of Motion for Preliminary 
Approval of Class Action Settlement and for Certification of a 
Settlement Class, Jabbari v. Well Fargo & Co. et al., No. 15-2159 
(N.D. Cal. Apr. 20, 2017) ECF No. 111. See also Part VI.B.3 above 
(discussing this proposed class action settlement) and Part VI.B.2 
(discussing the Bureau's enforcement action concerning the same 
conduct).
---------------------------------------------------------------------------

    Moreover, while the Bureau was unable to determine in what 
percentage of all class action cases analyzed defendants had 
arbitration agreements and were in a position to invoke an arbitration 
agreement, 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.\598\ This is strong evidence 
that companies that do include arbitration agreements in their consumer 
contracts are very likely to use them to block class actions filed 
against the company. As noted, the experiences of many public-interest 
consumer lawyer and consumer lawyer and law firm commenters buttress 
this finding, as does the evidence with respect to companies' 
articulated reasons for including arbitration agreements in their 
consumer finance contracts.
---------------------------------------------------------------------------

    \598\ Study, supra note 3, section 6 at 61.
---------------------------------------------------------------------------

    The Study further indicated that companies were at least 10 times 
more likely to move to compel arbitration in a case filed as a class 
action than in a non-class case.\599\ Put another way, companies used 
arbitration agreements far more frequently to block class actions than 
to move individual court cases to arbitration. While some industry 
commenters disputed the relevance of this comparison because they 
contended the overall frequency of class actions blocked by arbitration 
agreements is low, the Bureau finds that this data showed that most 
companies are more concerned with stopping putative class actions from 
proceeding than they are with determining in what forum (court or 
arbitration) individual disputes are resolved. Indeed, this data 
confirmed the direct evidence 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 some 
industry and research center commenters have touted the benefits of 
arbitration as a forum of individual dispute resolution because it is, 
for example, quicker and simpler than litigation, as discussed below in 
Part VI.C.1, for many providers, those

[[Page 33276]]

benefits seem ancillary to their ability to limit class actions. 
Indeed, many industry commenters stated that they would no longer 
include arbitration agreements in their consumer contracts if the class 
rule were finalized, indicating that the primary purpose of those 
arbitration agreements is in fact to block class actions.
---------------------------------------------------------------------------

    \599\ Id. section 6 at 57-58.
---------------------------------------------------------------------------

    Pursuit of individual claims after class actions blocked. The 
Bureau further finds that when courts grant a motion to dismiss class 
claims based on arbitration agreements, most consumers who would have 
constituted the putative class are unlikely to pursue the claims on an 
individual basis in any forum 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 individual arbitration filings 
in the court dockets or AAA case data, only two of which the Study 
determined were filed as putative class arbitrations.\600\ 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.
---------------------------------------------------------------------------

    \600\ Id. section 6 at 59. The record reflects that the 
arbitrator denied class status to one of the arbitrations filed on a 
class basis; the Bureau does not have information on the second 
arbitration.
---------------------------------------------------------------------------

    The Bureau's case study of opt-outs from settlements in the 
Preliminary Results of the Study further demonstrated this.\601\ 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 AAA as the arbitration administrator. In these 
settlements, 3,605 of the 13 million class members chose to opt out of 
receiving cash relief.\602\ Nevertheless, just three out of these 3,605 
individuals appear to have taken the opportunity to file arbitrations 
in AAA against the same settling defendants.\603\ Although the case 
study is a limited sample, the Bureau has little reason to believe (nor 
have commenters put forth evidence to the contrary) that consumers in 
putative class cases that never even go through certification and opt-
out processes would be more likely to refile in arbitration. Indeed, as 
two consumer law firm commenters noted, most members of putative 
classes do not even know they have a potential claim. With respect to 
the industry commenter that criticized this data as too limited because 
the Bureau searched only for arbitrations filed before AAA and did not 
search for whether those consumers who opted out filed in a JAMS 
arbitration or in a case filed in court, as noted in the proposal, the 
Bureau obtained data from JAMS--not disputed by any commenter--
indicating that the number of consumer arbitrations filed in that forum 
in 2015 was 115 or approximately one-quarter the number filed with 
AAA.\604\ Thus, even if every single arbitration filed with JAMS 
involved a consumer that opted out of a class action, that number would 
be small in comparison to the number of consumers for consumer 
financial products and services. With respect to the commenter's 
argument that cases may have been re-filed in court, the Study found 
that individuals file very few cases in Federal court in comparison to 
the size of the consumer financial marketplace, as discussed in detail 
above in Part VI.B.2.
---------------------------------------------------------------------------

    \601\ See Preliminary Results, supra note 150, at 86-87.
    \602\ See id. at 104.
    \603\ 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. Id. at 104 n.225.
    \604\ 81 FR 32830, 32856 (May 24, 2016).
---------------------------------------------------------------------------

    Suppression of claims. In addition to blocking class actions that 
are actually filed, the Bureau finds that arbitration agreements 
inhibit putative class action claims from being filed at all for 
several reasons. Numerous public-interest consumer lawyers and consumer 
lawyer and law firm commenters indicated that--based on their own 
experiences--they did not file class actions when they knew that a 
class claim might be blocked by an arbitration agreement. These 
commenters explained that plaintiffs and their attorneys frequently 
choose not to file such claims because arbitration agreements 
substantially lower the possibility of classwide relief. Given this 
evidence and the fact that attorneys incur costs in preparing and 
litigating a case under a contingency pricing structure, attorneys 
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 an attorney 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.
    The Bureau admittedly cannot quantify this effect because there are 
no records of cases that were never filed in the first instance. 
Nevertheless, stakeholders that surveyed attorneys found that 
respondents reported frequently turning away cases--both individual and 
class--when arbitration agreements were present.\605\ The consumer 
lawyer and law firm commenters that provided details on their personal 
experiences with cases they declined to pursue support these surveys. 
While industry commenters criticized that data as anecdotal and not 
taking into account whether a case rejected by one attorney was taken 
up by another, these commenters produced no evidence, anecdotal or 
otherwise, to suggest that the existence of an arbitration agreement 
does not have a bearing on whether an attorney would pursue a class 
claim against a company.
---------------------------------------------------------------------------

    \605\ In response to the Bureau's Request for Information in 
connection with the Study, one trade association of consumer lawyers 
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. 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 10. Id. 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.
---------------------------------------------------------------------------

    For all of these reasons, the Bureau finds that arbitration 
agreements block class actions and suppress the filing of others.
5. Public Enforcement Is Not a Sufficient Means To Enforce Consumer 
Protection Laws and Consumer Finance Contracts
    In the proposal, the Bureau preliminarily concluded, 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. This conclusion was 
based upon several findings: Consumer protection statutes explicitly 
provide for both public and private enforcement; the market for 
consumer financial products and services is enormous and public 
enforcement resources are limited; the Study results supported a 
conclusion

[[Page 33277]]

that private class actions complement public enforcement; and there are 
some claims concerning consumer financial products and services for 
which there is no public enforcement.
Comments Received
    Statutes provide for class actions. Few commenters disagreed with 
the Bureau's preliminary findings that consumer protection statutes 
explicitly provide for both public and private enforcement and that 
when Congress and State legislatures authorized private enforcement, 
that generally includes private class actions.\606\ Indeed, consumer 
advocate and nonprofit commenters emphasized the consumer protection 
role of specific statutes as a reason not to allow arbitration 
agreements to block class actions. A research center commenter opined 
that unfettered and meaningful access to the courts has long played a 
critical role in the effective functioning of the United States' system 
of governance. A public-interest consumer lawyer commenter highlighted 
the role of private litigation under fair housing laws as an example of 
where private litigation has provided clear benefits to class members. 
This commenter also noted that public regulatory bodies may also be 
geographically distant from sites of harm and generally have access to 
less information about unlawful conduct as compared to private 
litigants.
---------------------------------------------------------------------------

    \606\ One industry commenter noted that Utah law permits closed-
end credit contracts to include class action waivers, which the 
Bureau discusses further below in Part VI.C.2. Another nonprofit 
commenter specifically asserted that Congress intended statutes that 
provide for statutory damages, such as EFTA, to be enforced on an 
individual rather than a classwide basis, and suggested the rule 
should only apply to laws that explicitly permit class actions. As 
noted in the Bureau's Section 1022(b)(2) Analysis, however, EFTA 
does explicitly provide for classwide damages.
---------------------------------------------------------------------------

    Public enforcement resources are limited. With respect to the 
Bureau's assertion that public enforcement resources are limited in 
comparison to the size of the market for consumer financial products 
and services, numerous industry commenters disagreed. One such 
commenter noted that the Bureau has broad enforcement authority and has 
produced approximately $11 billion in consumer relief through the end 
of 2015, thus demonstrating the extent of the Bureau's resources to 
enforce the relevant laws. Another industry commenter stated that 
Bureau enforcement actions typically provide more relief to consumers 
than the relief provided from class actions. As compared to the 
approximately $32 per person that consumers received from class actions 
in the Study, another industry commenter reported that Bureau 
enforcement actions provided $440 on average in relief per consumer to 
more than 25 million consumers. This commenter contended that the 
threat of public enforcement creates sufficient deterrence to ensure 
that companies will comply with the relevant laws. Indeed, another 
industry commenter cited a survey showing that 86 percent of companies 
surveyed have increased their compliance spending since 2010, when the 
Bureau was created.\607\ One industry commenter stated that public 
enforcement actions are preferable to private enforcement (i.e., class 
actions) because private class action attorneys are motivated to bring 
cases for their own financial self-interest and care little about 
curtailing harmful conduct or compensating injured consumers. At least 
one industry commenter asserted that the preliminary findings were 
deficient because the Study did not prove that public enforcement alone 
is insufficient to enforce the consumer protection laws. One trade 
association commenter representing consumer reporting agencies stated 
its belief that the Bureau has sufficient resources to supervise and 
enforce consumer reporting agencies because the Bureau supervises only 
30 such companies pursuant to its larger participant rule for that 
market. According to the commenter, the Bureau should have no resource 
constraints with respect to supervising those 30 entities.
---------------------------------------------------------------------------

    \607\ Aptean, ``2015-2016 Aptean Consumer Complaints Compass: A 
Survey of U.S. Financial Service Executives Regarding CFPB 
Compliance,'' (2016), available at http://images.broadcast.aptean.com/Web/Aptean/percent7Bd0da75db-6649-4133-bc5a-4f189f65282bpercent7D_Respond_APT_CFPB_Survey_Fast_Facts_03-18-16.pdf.
---------------------------------------------------------------------------

    Consumer advocate commenters, on the other hand, agreed with the 
Bureau's preliminary findings regarding public enforcement. 
Specifically, these commenters referenced examples of strained public 
resources for consumer protection. One public-interest consumer lawyer 
commenter suggested that private enforcement of some claims saves 
taxpayers money because such activity allows public enforcement 
agencies to concentrate their resources on cases that private claims 
cannot reach or that are more appropriate cases for public enforcement. 
One consumer advocate noted that industry commenters were inconsistent 
in arguing that the public enforcement by the Bureau provides a 
sufficient deterrent given that these same commenters are asking 
Congress and others to substantially reduce or eliminate altogether the 
Bureau's enforcement powers.
    Class actions complement public enforcement. With respect to the 
Bureau's preliminary finding that the Study showed that private class 
actions are a necessary companion to public enforcement of consumer 
finance injuries, several industry commenters disagreed. One commenter 
asserted that the Study's finding that public enforcement cases overlap 
with private class actions in 32 percent of the cases analyzed 
represents a significant amount of duplication. An industry commenter 
then suggested that overlap would increase because it expected the 
number of Bureau enforcement actions to rise. Another industry 
commenter disagreed with the relevance of the Bureau's preliminary 
finding that many private class action settlements occur without a 
corresponding public enforcement action. Another industry commenter 
stated that when a private class action is filed without a 
corresponding government action, the class action could have been based 
on a news story or other public information, and thus may not involve 
situations in which the plaintiff's attorney independently discovered 
the wrongdoing. In addition, the commenter noted that private class 
actions filed in the absence of a public enforcement action could have 
been based on government investigations that uncovered wrongdoing but 
did not lead to an enforcement action, perhaps because the wrongdoing 
harmed only a few individuals or because there was no wrongdoing at 
all.
    Another industry commenter criticized the Study's finding that 
class actions are often filed without a corresponding public 
enforcement action as simply wrong. The commenter suggested that most 
class actions are ``copycats'' of government enforcement actions, 
citing law review articles supporting this theory.\608\ In addition, 
the commenter cited examples of settled class actions in which the FTC 
filed amicus briefs requesting that fees for class counsel be reduced 
because the settled case followed directly from an FTC investigation 
and enforcement action.\609\
---------------------------------------------------------------------------

    \608\ John H. Beisner et al., ``Class Action ``Cops'': Public 
Servants or Private Entrepreneurs?,'' 57 Stan. L. Rev. 1441, 1453 
(2005); see also, e.g., Howard M. Erichson, ``Coattail Class 
Actions: Reflections on Microsoft, Tobacco, and the Mixing of Public 
and Private Lawyering in Mass Litigation,'' 34 U.C. Davis L. Rev. 1, 
2 (2000).
    \609\ Beisner et al, supra note 608, at 1453 (citing Brief of 
Amicus Curiae The Federal Trade Commission, In re First Databank 
Antitrust Litig., 209 F. Supp. 2d 96, No. 01-00870, (D.D.C. 2002); 
Brief of Amicus Curiae The Federal Trade Commission, In re Buspirone 
Patent Litig., 185 F. Supp. 2d 340, No. 1410 (S.D.N.Y. 2002). Id. at 
1453-54.

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

[[Page 33278]]

    Consumer advocates and public-interest consumer lawyers disagreed. 
For example, one consumer advocate asserted that companies know that 
public enforcers cannot police every instance of financial fraud and 
that companies therefore make compliance decisions accordingly. A 
separate nonprofit commenter stated that legislatures designed laws to 
have both public and private enforcement; where the latter is 
effectively blocked, the laws' intended effect cannot be achieved. 
Another nonprofit commenter contended that private class actions are a 
necessary supplement to public enforcement in the areas of fair lending 
and equal credit and that this was the view of Congress in passing the 
nation's fair lending laws. This commenter also noted that 
individually, privately filed cases can spur subsequent public 
enforcement actions.
    A group of State attorneys general charged with enforcing the laws 
in their States expressed similar concerns about the inability of 
public enforcement authorities--including themselves--to enforce all of 
consumer protection law. They noted that, in their experience, public 
enforcement is benefited when consumers can also take advantage of 
private enforcement. The commenters noted that many States' unfair 
competition and consumer protection laws expressly permit private 
enforcement, often through class actions. As an example, they quoted a 
decision by the Massachusetts Supreme Judicial Court finding that that 
State's law had been amended to allow private enforcement specifically 
because the public enforcement agency lacked capacity to handle the 
complaints it was receiving.\610\ Another State attorney general, 
writing separately, made a similar point.
---------------------------------------------------------------------------

    \610\ Slaney v. Westwood Auto, Inc., 366 Mass. 688, 697, 700, 
322 NE.2d 768, 775-77 (1975); see also Grayson v. AT&T, 15 A.2d 219, 
240 (DC 2010) (Providing a private right of action in order to 
``allow the government to coordinate with the nonprofit and private 
sectors more efficiently. . . . Public-interest organizations will 
be able to bring additional resources to consumer protection 
enforcement in the District, contributing private and donated funds 
that will advance public priorities without causing the expenditure 
of additional government resources.'').
---------------------------------------------------------------------------

    A nonprofit organization commented that private enforcement was 
important because it may advance more aggressive legal theories and 
seek more substantial remedies as compared to government agencies. 
Other public-interest consumer lawyer commenters similarly emphasized 
that, in their view, public enforcement is insufficient. A public-
interest consumer lawyer commenter opined that public enforcement 
agencies are unlikely to have the resources to uncover all instances of 
unlawful conduct and that these agencies can be subject to political 
pressures and limitations by the executive or legislative branches of 
government.\611\
---------------------------------------------------------------------------

    \611\ In support, this commenter cited to Jason Rathod and 
Sandeep Vaheesan, ``The Arc and Architecture of Private Enforcement 
Regimes in the United States and Europe: A View Across the 
Atlantic,'' 14 U. of N.H. L. Rev. 306, at 309 (2015) (noting that 
``[w]ith large populations and complex economies, even a team of 
committed public enforcers cannot be expected to catch, let alone 
prosecute, every violation. . . . And during times of fiscal 
austerity, government budget cuts further diminish the ability of 
enforcement agencies to uncover wrongdoing'') (internal citations 
omitted).
---------------------------------------------------------------------------

    Academic commenters explained that, in their view, the United 
States legal system depends in large part on private enforcement of the 
laws. This comment letter contrasted the American system with those of 
other countries that invest more in public enforcement. They also 
noted, and cited the Study, that consumer class actions provide relief 
for injuries that are not the focus of public enforcers. An individual 
consumer noted in her letter that class actions, unlike increased 
public enforcement budgets, do not increase government bureaucracy. 
Relatedly, another individual consumer commenter and a nonprofit both 
suggested that while class actions should be generally available, they 
especially should be available for claims brought pursuant to statutes 
that expressly provide for classwide civil liability.
Response to Comments and Findings
    Statutes provide for class actions. As noted by many commenters, 
including a group of State attorneys general, 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 
public enforcement. For other laws, lawmakers have expressly decided 
that there should be both public and private enforcement. For example, 
on several occasions, Congress expressly recognized the role class 
actions can have in effectuating Federal consumer financial protection 
statutes. Commenters noted that State legislators have often done the 
same. As described in Part II.A, for instance, Congress amended the 
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).\612\ 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 
put forth for the increase was the need to adequately deter large 
creditors.\613\ No commenters disagreed with any of these findings and 
several consumer advocate commenters highlighted other, similar 
examples from State law.\614\
---------------------------------------------------------------------------

    \612\ ``Class Actions Under the Truth in Lending Act,'' 83 Yale 
L.J. 1410, at 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.'').
    \613\ Consumer Leasing Act of 1976, S. Rept. 94-590, 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 Electronic Fund 
Transfer Act (1978), H. Rept. 95-1315, at 15.
    \614\ See, e.g., Iowa Code ch. 714H; California Unfair 
Competition Law, Bus. & Prof. Code, Sec.  17200 et seq.; 
Massachusetts Consumer Protection Law, G.L. c. 93A, Sec.  9; N.Y. 
Gen. Bus. Law Sec.  349(h); District of Columbia Consumer Protection 
Procedures Act, DC Code Sec.  283905(k)(l)(A).
---------------------------------------------------------------------------

    Public enforcement resources are limited. The market for consumer 
financial 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 in 
Part VIII, this rule alone would cover about 50,000 firms. In contrast 
to the size of the market, the resources of public enforcement agencies 
are limited. For example, the Bureau enforces over 20 separate Federal 
consumer financial protection laws (including the Dodd-Frank Act's 
prohibition on unfair, deceptive and abusive practices) with respect to 
every depository institution with assets of more than $10 billion and 
non-depository institutions. Yet the Bureau has about 1,600 employees, 
less than half of whom work in its Division of Supervision, 
Enforcement, and Fair Lending, which supervises for compliance and 
enforces violations of these laws.\615\ Furthermore, the Bureau

[[Page 33279]]

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. Additionally, 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.
---------------------------------------------------------------------------

    \615\ Bureau of Consumer Fin. Prot., ``Financial Report of the 
Consumer Financial Protection Bureau for Fiscal Year 2016,'' at 13 
(Nov. 15, 2016), available at https://www.consumerfinance.gov/documents/1495/112016_cfpb_Final_Financial_Report_FY_2016.pdf 
(stating that, as of Sept. 30, 2016, the Bureau had 1,648 employees, 
44 percent of whom worked in the Division of Supervision, 
Enforcement, and Fair Lending).
---------------------------------------------------------------------------

    With respect to commenters that believe the amount of relief that 
the Bureau has provided to consumers through its enforcement cases 
demonstrates that the Bureau has sufficient resources to enforce the 
relevant consumer protection laws with respect to all potential 
wrongdoers, the Bureau acknowledges that it has provided significant 
relief to consumers since 2012. At the same time, the Bureau is also 
aware that its enforcement and supervision efforts have not been able 
to examine the conduct of every provider subject to its jurisdiction 
under every law that it enforces.\616\ As noted above, excluding the 
mortgage market and certain other types of financial services not 
covered by this rule, there are at least 50,000 companies that fall 
within the Bureau's jurisdiction. The Bureau cannot conceivably 
supervise or investigate all of those firms or even necessarily take 
action each time it uncovers some evidence of wrongdoing. Thus, with 
respect to the trade association commenter's contention that the Bureau 
could easily supervise all 30 larger participant consumer reporting 
agencies, the Bureau emphasizes that its resources are spread not just 
among those 30 agencies but among the tens of thousands of other 
entities within the Bureau's jurisdiction. While the number of larger 
participant entities in any particular market may be small, the total 
number of entities for which the Bureau is tasked with enforcing the 
law is enormous. Indeed, the Bureau has recognized it must prioritize 
when it brings public enforcement actions and generally chooses to do 
so where the harms are most egregious and the most consumers are 
affected by those harms. This prioritization may leave harms that 
affect relatively fewer consumers, such as some harms by smaller 
providers, unremedied by public enforcement. As to the amount of money 
recovered by the Bureau, commenters did not state that it represents 
all (let alone a meaningful percentage) of the harm that exists in the 
marketplace, nor is there evidence to support such a contention. Based 
on its experience and expertise, the Bureau believes that the amounts 
it has recovered do not represent all of the harm.
---------------------------------------------------------------------------

    \616\ Whether that will change, as one commenter suggested, is 
addressed below in this Part VI.B.5.
---------------------------------------------------------------------------

    Furthermore, as several consumer advocate commenters noted, the 
Bureau does not have jurisdiction to enforce all violations of the law 
pertaining to consumer finance. Specifically, the Bureau cannot enforce 
claims for violation of State statutes, or claims arising in tort 
(which includes claims sounding in fraud) or those that allege breach 
of contract. The Bureau also cannot pursue claims against depository 
institutions and credit unions with less than $10 billion in assets. 
For all of these reasons, the Bureau finds that its enforcement 
authority alone is insufficient to remedy all violations of the law and 
deter future violations.
    With respect to the quantity of relief the Bureau has provided to 
consumers, for the years of 2013 through 2016, the Bureau brought 165 
enforcement actions or an average about 41 enforcement actions per 
year. This is significantly fewer than the 85 class action consumer 
finance settlements on average identified in the Study per year (a 
figure that the Bureau's Section 1022(b)(2) Analysis predicts will be 
165 per year once this rule takes effect). And while the number of 
Bureau enforcement cases has increased year-over-year in the near past, 
the number of cases that the Bureau brings every year is subject to 
change, as some commenters noted. Further, only some of these 
enforcement actions and a portion of the approximately $11 billion in 
relief provided by the Bureau through its enforcement actions over the 
past four years concern claims that would be covered by this rule. For 
example, over $2.5 billion of that relief concerned mortgages, a 
product not covered by this rule.
    The Bureau acknowledges, as several commenters noted, that the 
Bureau's enforcement actions provided, on average, more relief per 
consumer than did class action settlements. This reflects the fact that 
Bureau enforcement may target higher value cases. It may also reflect 
the fact that the Bureau may be able to pursue cases more effectively 
than private class actions because, for example, the Bureau has 
authority to issue civil investigative demands, the Bureau does not 
need to cover its costs out of recoveries, does not need to certify a 
class, and can pursue certain claims unavailable to private 
litigants.\617\ But the fact that public enforcement may be a more 
effective mechanism to secure relief for some consumers on some claims 
does not mean that it is a sufficient mechanism in and of itself to 
secure relief on all claims for all consumers. Indeed, private class 
actions are able to pursue violations of law that the Bureau does not 
have the resources or enforcement authority to pursue, thereby 
providing additional relief to consumers and deterring companies from 
future violations of the law.
---------------------------------------------------------------------------

    \617\ Of course, these figures do not include investigations and 
other cases abandoned by the Bureau.
---------------------------------------------------------------------------

    With respect to commenters that contended that public enforcement 
actions are better avenues to address violations of the law because 
public enforcers are not motivated by their own self-interest to bring 
cases, the Bureau disagrees that differing motives, if they exist, are 
relevant. Whatever the motivations of plaintiff's attorneys to bring 
cases, the Bureau has observed that public enforcers do not have the 
resources to bring sufficient cases to remedy all violations of the 
law, and thus that private enforcement of such violations is necessary. 
Further, as discussed more fully in Part VI.C.2, the Bureau does not 
agree that the motivation of private plaintiff's attorneys determines 
whether class action settlements benefit consumers. Indeed, the 
prospect of fee awards is specifically designed to incentivize 
plaintiff's attorneys to bring class action cases that individuals 
might not otherwise pursue, and courts monitor attorney's fee awards to 
ensure that they are fair and reasonable.
    The Bureau notes that most of the commenters critical of the 
Bureau's preliminary findings regarding public enforcement focused on 
the Bureau's own enforcement authorities and accomplishments, and to a 
large extent did not address enforcement by other Federal and State 
regulators. Most of these other regulators, as the comment letter from 
the group of State attorneys general noted, enforce not only consumer 
protection laws but also many other laws and must allocate their 
enforcement resources accordingly. In addition, as several commenters 
noted, these regulators, like the Bureau, must manage general budgetary 
constraints, changing legislative priorities, and

[[Page 33280]]

limitations on jurisdiction and authorities, such as over tort or 
contract claims, that are more suited to private actions.
    Finally, the Bureau notes that if the commenters were correct in 
claiming that public enforcement is sufficient to address all 
misconduct in the covered consumer finance markets and secure relief 
for those affected, the Bureau would expect to see a low incidence of 
class action litigation due to incentives facing plaintiff's attorneys. 
Further, the Bureau would expect to see small settlements given that 
settlements are generally a function of the expected value of the 
claims. As discussed above, the evidence with respect to number, size, 
and relief obtained in class actions belies the claim that public 
enforcement is sufficient to fully vindicate consumers' rights under 
the consumer protection laws.
    Class actions complement public enforcement. 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.\618\ 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.\619\
---------------------------------------------------------------------------

    \618\ Study, supra note 3, section 9 at 4.
    \619\ Id.
---------------------------------------------------------------------------

    In response to commenters that asserted that this still left 
significant amounts of overlap between private and public cases, the 
Bureau notes that where there was overlap, private class actions appear 
to have preceded public enforcement actions roughly two-thirds of the 
time. Moreover, when there are private cases that follow public 
enforcement, courts can and do take the earlier public case into 
account when approving settlements and calculating attorney's fees. For 
example, one commenter noted cases where the FTC filed an amicus brief 
requesting that the court reduce plaintiff's attorney fees for a class 
action settlement that followed a public enforcement matter on the same 
facts.\620\ Further, resources for judges who manage class actions have 
favorably cited this case as a model for Federal judges handling such 
follow-on private litigation.\621\ As for the commenters that suggested 
that private class actions that did not overlap with public enforcement 
cases are somehow less valuable because they may have been based on 
public news reports or on evidence uncovered by public enforcers in 
investigations that were not pursued, the Bureau does not believe the 
origin of those private cases is relevant. Instead, regardless of 
origin, those cases provided relief to consumers for violations of the 
law that public enforcers otherwise did not or were not able to pursue.
---------------------------------------------------------------------------

    \620\ In re First Databank Antitrust Litig., 209 F.Supp.2d 96 
(D.D.C. 2002)
    \621\ Barbara J. Rothstein & Thomas E. Willging, ``Managing 
Class Action Litigation: A Pocket Guide for Judges,'' Fed. Jud. 
Ctr., at 26 (2005), available at http://www.uscourts.gov/sites/default/files/classgde.pdf (citing, e.g., Swedish Hospital Corp. v. 
Shalala, 1 F.3d 1261, 1272 (D.C. Cir. 1993) (affirming district 
court's decision to ``bas[e] its fee calculation only on that part 
of the fund for which counsel was responsible'' where class counsel 
brought a case that ``rode `piggyback' '' on a previous action); In 
re First Databank Antitrust Litig., 209 F.Supp.2d 96, 98 (D.D.C. 
2002)).
---------------------------------------------------------------------------

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

    In the proposal, the Bureau preliminarily found, in light of the 
Study and the Bureau's experience and expertise, 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 legally risky or potentially 
illegal activities and reduce the likelihood that consumers would be 
subject to such practices in the first instance. The Bureau further 
preliminarily found that because of these outcomes, allowing consumers 
to seek class action relief was consistent with the Study and would be 
in the public interest and for the protection of consumers. The Bureau 
made this preliminary finding after considering 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 found that the statutory standard was satisfied.
    The sections below discuss the bases for the preliminary findings, 
comments received, and the Bureau's further analyses and final findings 
in support of the class rule 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 incentives to comply with the law and causing companies to 
choose between increased risk mitigation and enhanced exposure to 
liability imposes certain burdens on providers. These burdens are 
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 putative class actions themselves, 
including, in some cases, providing relief to a class and payment to 
its attorneys. The Bureau also recognizes that providers may pass 
through some or all 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 in Part VIII and, with 
regard in particular to burdens on small financial services providers, 
discussed further below in Part VII in the section-by-section analysis 
to proposed Sec.  1040.4(a) and in the final Regulatory Flexibility 
Analysis below in Part IX.
1. Enhancing Compliance With the Law and Improving Consumer 
Remuneration and Company Accountability Is for the Protection of 
Consumers
    In the proposal, the Bureau preliminarily found that the class 
rule, 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.
    To the extent that laws cannot be effectively enforced, the Bureau 
explained in the proposal that it believed 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 materially reduced. 
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.

[[Page 33281]]

    As discussed in the proposal's 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 
\622\ and the courts \623\ have long recognized that deterrence is one 
of the primary objectives of class actions.
---------------------------------------------------------------------------

    \622\ H. Rept. 94-589, Equal Credit Opportunity Act Amendments 
of 1976, at 14 (Jan. 21, 1976).
    \623\ 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.'').
---------------------------------------------------------------------------

    The preliminary finding that class action liability deters 
potentially illegal conduct and encourages investments in compliance 
was 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 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 stated that it was 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 was 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,\624\ for instance claims 
pertaining to EFTA,\625\ FACTA,\626\ FCRA,\627\ FDCPA,\628\ and the 
TCPA.\629\
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    \624\ A brief search by the Bureau 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 LLP, ``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,'' at 49-52 (2013) 
(noting a variety of compliance activities companies should consider 
in product design in order to mitigate class action exposure).
    \625\ 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.'').
    \626\ 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 LLP, ``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.'').
    \627\ 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.'').
    \628\ 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).
    \629\ 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 
stated in the proposal that it had 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 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.'' \630\ Another alert relating

[[Page 33282]]

to electronic payments litigation noted that firms could either improve 
their compliance efforts or adopt arbitration agreements to limit their 
class action exposure.\631\ Similarly, the Bureau noted that industry 
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.\632\
---------------------------------------------------------------------------

    \630\ See, e.g., Jones Day LLP, ``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/.
    \631\ 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).''). See also infra note 670 (noting that this trend 
has continued with regard to the proposal itself, as law firms have 
advised clients to review their compliance materials given the 
potential that the Bureau would finalize the proposal).
    \632\ 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.
---------------------------------------------------------------------------

    The Bureau also stated in the proposal that while it believed 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, however, identified 
instances where it believed 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 automobile 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.\633\ The use of 
caps has continued even after the consent decrees that triggered them 
have expired.\634\
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    \633\ See F&I and Showroom, ``2.5 Percent Markups Becoming the 
Trend,'' (Aug. 9, 2005), available at 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: Fast Facts,'' (FFVR 35, revised Nov. 2016), available at 
https://www.dmv.ca.gov/portal/dmv/?1dmy&urile=wcm:path:/dmv_content_en/dmv/pubs/brochures/fast_facts/ffvr35.
    \634\ 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, the Bureau noted in the proposal that since 
2012, 18 banks have entered into class action settlements as part of 
the Overdraft MDL,\635\ 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.\636\
---------------------------------------------------------------------------

    \635\ See supra note 501 and accompanying text.
    \636\ See Pew Charitable Trusts, ``Checks and Balances: 2015 
Update,'' at 12 fig. 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. Independent Community Banks of America, ``The 
ICBA Overdraft Payment Services Study,'' at 40 (June 2012), 
available at http://www.icba.org/docs/default-source/icba/solutions-documents/knowledge-vault/icba-surveys-whitepapers/2012overdraftstudyfinalreport.pdf. Only 8.8 percent of community 
banks reordered transactions from high to low dollar amount. Id. at 
42 and 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.
---------------------------------------------------------------------------

    The proposal noted a third example of companies responding to class 
actions by changing their practices to improve their compliance with 
the law that relates to foreign transaction fees and debit cards. In re 
Currency Conversion Fee Antitrust Litigation (MDL 1409) was 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.\637\ 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.\638\ A 
review of the market subsequent to the 2006 settlement indicated 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.\639\
---------------------------------------------------------------------------

    \637\ Third Consolidated Amended Class Action Complaint, In Re 
Currency Conversion Fee Antitrust Litig., 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 percent 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'').
    \638\ Stipulation & Agreement of Settlement at 27-30, In re 
Currency Conversion Fee Antitrust Litig., No. 1409 (S.D.N.Y. July 
20, 2006).
    \639\ 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), 
available at 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.'').
---------------------------------------------------------------------------

    As the proposal explained, these are a few examples of industry-
wide change in response to class actions that the Bureau believed 
support its preliminary

[[Page 33283]]

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.\640\ 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 stated in the proposal 
that it believes that the result would be more legally compliant 
consumer financial products and services that would advance the 
protection of consumers.
---------------------------------------------------------------------------

    \640\ 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 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 in many 
cases can (and 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 proposal's Section 1022(b)(2) 
Analysis, the Bureau did not believe it possible to quantify the 
benefits to consumers from the increased compliance incentives 
attributable to the class proposal due in part to the difficulty of 
measuring the value of deterrence in a systematic way. Nonetheless, the 
Bureau preliminarily found that increasing compliance incentives would 
be for the protection of consumers.
    The Bureau recognized 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 unlawful. Other companies may seek to mitigate their 
risk but may miscalibrate and underinvest or under comply. To the 
extent that this happens, the Bureau preliminarily found that the class 
proposal would enable many more consumers to obtain redress for 
violations than do so now while companies can use arbitration 
agreements to block class actions. As set out in the proposal'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.\641\
---------------------------------------------------------------------------

    \641\ 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 found that through such 
litigation consumers would be better able to cause providers to cease 
engaging in unlawful or legally risky 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 Bureau offered the Overdraft MDL as an example to help 
illustrate the potential ongoing value of such prospective relief. A 
2015 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 reviewed settlement 
documents and found that 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.\642\ 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.\643\ 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.
---------------------------------------------------------------------------

    \642\ Fitzpatrick & Gilbert, supra note 484, at 785, (``[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.
    \643\ See id. at 786 and 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) 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.\644\ 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 this one example showed, prospective relief--because it 
can continue in perpetuity--can have wide-ranging benefits for 
consumers over and

[[Page 33284]]

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.
---------------------------------------------------------------------------

    \644\ 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 does the 
benefit include 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 stated in the proposal that it 
believed 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, deceptive, and abusive debt collection 
practices proscribed by the FDCPA and the discriminatory practices 
proscribed by ECOA.\645\ In those States that provide for private 
enforcement of their unfair 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.
---------------------------------------------------------------------------

    \645\ See generally Study, supra note 3, section 8 at 13 and 
fig. 1 (noting the number of class settlements by frequency of claim 
type).
---------------------------------------------------------------------------

    The Bureau also discussed in the proposal that some stakeholders 
had predicted during the SBREFA phase and other early outreach that 
pursuing a class rule would lead them to remove arbitration agreements, 
either because arbitration agreements served no purpose if they did not 
operate to block class actions or because the costs of individual 
arbitration to providers were substantial enough that providers would 
want to eliminate that dispute resolution channel in the absence of 
offsetting benefits from blocking class actions.\646\ The Bureau 
acknowledged in the proposal that it was possible that providers would 
not maintain their arbitration agreements if they concluded that 
individual arbitration provides no benefit to themselves or their 
customers, but was not persuaded that such an outcome was certain 
simply because the rule would change the outcome on class proceedings. 
In particular, the Bureau noted that because providers would still face 
some individual disputes in any event, it was not entirely clear how 
providers would evaluate the tradeoffs between different channels for 
resolving those disputes in isolation, if class proceedings were 
subject to the proposed rule.
---------------------------------------------------------------------------

    \646\ The Bureau addressed this concern in the proposal in the 
context of its preliminary findings that the class proposal was in 
the public interest. In this final rule, however, the Bureau 
addresses this concern in the context of its finding that the class 
rule is for the protection of consumers, because many commenters 
raised concerns that the loss of individual arbitration as a forum 
would harm consumers. As noted below in Part VI.C.2, however, if 
providers choose to remove arbitration agreements from their 
contracts, the loss of individual arbitration as a form of dispute 
resolution arguably impacts both providers and the public interest. 
Accordingly, the Bureau incorporates this discussion with respect to 
its public interest findings as well.
---------------------------------------------------------------------------

    For example, the Bureau noted that 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).\647\ Moreover, the costs of the 
upfront 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. 
Indeed, as explained in the proposal's Section 1022(b)(2) Analysis, 
providers generally already maintain two systems to the extent that 
most arbitration agreements allow for litigation in small claims 
courts. Thus, the Bureau did not understand 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 asserted benefits both themselves and consumers. 
Further, the Bureau stated that it did not believe that any resulting 
constraints on individual dispute resolution would be so severe as to 
outweigh the broader benefits of the class rule to consumers.
---------------------------------------------------------------------------

    \647\ See Study, supra note 3, section 5 at 75-76.
---------------------------------------------------------------------------

Comments Received
    Deterrence. Many industry, research center, State attorneys 
general, and individual commenters took issue with the Bureau's 
preliminary finding that the threat of private class actions deters 
companies from violating the law. However, these commenters generally 
did not disagree with the Bureau's basic premise that a system that 
provides for liability for violations of law promotes deterrence; 
instead they asserted that while deterrence in general may exist in 
such a system, class actions themselves either do not achieve increased 
deterrence or to the extent that they do increase deterrence, that 
increase is unnecessary or even harmful to consumers.
    Many of these industry, research center, and individual commenters 
contended that class actions do not deter violations of the law because 
they exert pressure on companies to settle whether or not the claims 
asserted have merit. The commenters asserted that such risk is 
unavoidable regardless of an entity's compliance efforts, and that 
companies will therefore not in fact increase such efforts. The 
pressure to settle exists in part, the commenters asserted, because 
defendant companies must bear high discovery and defense attorney costs 
and must consider the risk, no matter how small, of a large judgment in 
a case that is certified as a class action. The commenters asserted 
that providers are not willing to tolerate the risk that such a 
judgment would involve substantial payouts to each member of the class, 
even if the likelihood of the judgment occurring is low. These 
commenters contended that the pressure to settle regardless of the 
merit of the claims means that class actions do not deter wrongdoing, 
they are simply a ``cost of doing business.''
    One trade association commenter representing defense lawyers held 
the opposite view: class actions do deter violations of the law and in 
fact, they create ``over-deterrence.'' In this commenter's view, many 
class actions in the financial services market involve ambiguities and 
uncertainties in the law, rather than clear violations. Thus, when 
companies settle class actions without final adjudication of these 
uncertain legal issues and change their behavior to cease the conduct 
at issue, the commenter asserted that the companies may be avoiding 
behavior that is lawful, creating over-deterrence. Relatedly, another 
industry commenter stated its view that class action settlements are 
unfair when the law is ambiguous or uncertain and thus companies cannot 
predict that their conduct may violate the law and subject them to a 
class action. A nonprofit commenter also agreed that class actions 
deter wrongdoing, but contended that compliant providers are more 
likely to be sued in class actions than ``bad actor'' providers because 
the latter are likely judgment proof. In the commenter's view, this 
fact creates an imbalance wherein compliant providers are more deterred 
from bad behavior than non-compliant ones.
    In the Study, the Bureau found that class action settlements 
typically occur in conjunction with class certification,

[[Page 33285]]

which the Bureau stated in the proposal suggests that class 
certification does not itself pressure defendants to settle.\648\ Some 
industry commenters disagreed with the significance of this finding, 
contending that there is pressure to settle class actions at every 
stage of litigation, not just after class certification. Many industry 
and research center commenters further contended that the pressure to 
settle non-meritorious class actions is particularly acute in cases 
asserting claims under statutes that provide for statutory damages, 
such as FACTA, FCRA, and FDCPA, because the statutory damages 
multiplied by hundreds or thousands of potential class members can 
create potential liability of hundreds of millions or even billions of 
dollars.\649\ In these commenters' view, statutory damages were 
designed to incentivize individual claims, and when claims pursuant to 
those statutes are pursued using the class action device, they can 
create the potential for ruinous liability that creates massive 
pressure for companies to settle.
---------------------------------------------------------------------------

    \648\ Study, supra note 3, section 6 at 7.
    \649\ The Bureau notes that the FDCPA caps damages in a class 
action at the lesser of $500,000 or 1 percent of net worth of 
defendant; capped amount is in addition to any actual damages; 
punitive damages are not expressly authorized. 15 U.S.C. 
1692k(a)(2)(B).
---------------------------------------------------------------------------

    Some industry commenters agreed that the threat of class action 
liability deters at least some violations of the law, but contended 
that its deterrent effect is imprecise and inefficient because of 
statutes that provide for recovery of attorney's fees and double or 
treble damages. In these commenters' view, these remedy features 
incentivize attorneys to bring claims under statutes that have them (as 
opposed to bringing claims under other statutes or common law without 
those features) in order to maximize their own profit. One commenter 
asserted that the lawsuits themselves therefore bear no relation to the 
merit of the claims and thus do not deter wrongdoing.\650\ This 
inefficiency is compounded, according to the commenters, by the fact 
that statutory damages often provide for significant liability for 
technical violations of the law even where there has been no actual 
harm to consumers. For example, another commenter pointed out that 
companies can face massive liability class actions against merchants 
under FACTA for accidentally printing credit card expiration dates on a 
receipt, activity which the commenter contends does not harm consumers. 
A law firm commenter representing individual automobile dealers in 
California stated that the remedy for violations of certain State 
disclosure requirements for automobile purchases is restitution of the 
vehicle purchase price, resulting in enormous pressure for those 
dealers to settle cases alleging violations of those laws. As another 
example, a trade association representing consumer reporting agencies 
that offer credit monitoring products directly to consumers identified 
the penalty of disgorgement of all fees paid for the service for 
violations of CROA as disproportionate. In the view of the commenter, 
the prospect of such catastrophic damages does not deter wrongdoing; 
instead the commenter contends that compliance with CROA for its 
products is impossible, for reasons discussed below in this Part VI.C.1 
and in the section-by-section analysis of Sec.  1040.3(b) below in Part 
VII.
---------------------------------------------------------------------------

    \650\ Shepherd, supra note 515, at 2.
---------------------------------------------------------------------------

    On the other hand, a consumer advocate commenter, quoting Judge 
Richard Posner, contended that this is precisely the point:

    Society may gain from the deterrent effect of financial awards. 
The practical alternative to class litigation is punitive damages, 
not a fusillade of small-stakes claims. The deterrent objective of 
[EFTA] is apparent in the provision of statutory damages, since if 
only actual damages could be awarded, the providers of ATM services 
. . . might have little incentive to comply with the law.\651\
---------------------------------------------------------------------------

    \651\ Hughes v. Kore of Ind. Enter., 731 F.3d 672, 677 (7th Cir. 
2013) (citations omitted) (further noting that ``The smaller the 
stakes to each victim of unlawful conduct, the greater the economies 
of class action treatment and the likelier that the class members 
will receive some money rather than (without a class action) 
probably nothing, given the difficulty of interesting a lawyer in 
handling a suit for such modest statutory damages as provided for in 
the [EFTA].''). As the Bureau notes above, Congress amended EFTA to 
remove ATM sticker provisions.

    One research center commenter cited the Overdraft MDL settlements 
as an example of massive liability where consumers were not actually 
harmed and thus disagreed with the Bureau's reliance in the preliminary 
findings on those settlements as evidence of deterrence. The commenter 
asserted that banks lose money on free checking accounts and that 
overdraft fees were therefore necessary in order for banks to subsidize 
free checking accounts for consumers. The commenter therefore believed 
that the overdraft settlements did not remedy harm to consumers, but 
actually caused harm by decreasing the likelihood that banks will offer 
free checking accounts going forward. The same commenter criticized the 
Bureau's inclusion of the overdraft settlements as an example of 
litigation that prompted companies to change behavior because some 
banks continue to reorder consumer overdrafts in such a way as to 
maximize the fees charged to the consumer, despite that settlement. The 
commenter agreed, however, that the percentage of banks that employ 
this practice has diminished since the overdraft class action 
litigation began. An industry commenter asserted that the Bureau's 
examples of deterrence were misplaced because they concerned 
settlements, not actual findings or admissions that the defendants had 
broken the law and thus the Bureau lacked examples of illegal conduct 
being deterred. Asserting a similar concern, another industry commenter 
contended that to the extent that the class actions affect change in 
business practices, private class action settlements are not an 
efficient policymaking tool. One industry commenter further contended 
that because it views class actions as inefficient, the Bureau could 
more efficiently deter violations of the law by deciding which 
practices are unfair or deceptive and then informing companies of them.
    Several industry commenters disagreed with the Bureau's preliminary 
finding that class actions deter wrongdoing because they believe that 
the threat of public enforcement from the Bureau, other Federal 
agencies, or State attorneys general is more likely to deter companies 
from violating the law than any class action could. A group of State 
attorneys general similarly asserted that State consumer protection 
laws and the threat of State public enforcement are sufficient to deter 
violations of the law. Other industry commenters contended that 
companies are more likely to be deterred from violating the law by the 
threat of individual lawsuits or the threat that consumers will take 
their business elsewhere once they learn of the companies' violations; 
one of these commenters cited the Study's survey data on the likelihood 
of this occurring. A Tribal commenter stated its belief that consumers 
who obtain products or services from Tribes are sufficiently protected 
through Tribal regulation and enforcement of those regulations and thus 
there is no need for the deterrent effect of class actions with respect 
to Tribes.
    Several industry commenters asserted that even if class actions do 
deter wrongdoing, the deterrence they provide is not necessary because 
companies already comply fully with the law. In support, a credit union 
commenter provided data on the amount credit unions already spend to 
comply with regulations ($6.2 billion) and what it asserted was a 
similar additional financial impact of those

[[Page 33286]]

regulation to its business practices. Separately, one industry 
commenter rejected what it characterized as an assertion by the Bureau 
that companies are ``scofflaws.'' Such commenters cited data noting 
that companies have significantly increased their spending on 
compliance since the Bureau was established. Other industry, research 
center, and State regulator commenters contended that there is no 
empirical evidence that compliance with the law is currently under-
incentivized and that there is nothing in the Study that supports the 
Bureau's contentions to the contrary. Similarly, one industry commenter 
criticized the preliminary finding regarding deterrence because the 
Bureau did not study compliance rates of companies with and without 
arbitration agreements, arguing that the Bureau thus had no empirical 
evidence that companies with arbitration agreements have lower levels 
of compliance. Relatedly, an industry commenter asserted that the 
rulemaking record, including the SBREFA Report, indicates that 
companies do not intend to spend more on compliance and thus it has no 
deterrent effect. One State regulator commenter also urged the Bureau 
to do a thorough quantitative analysis to determine whether companies 
currently comply with the consumer financial laws at less than optimal 
levels. Relatedly, a comment from a group of State attorneys general 
asserted that market forces sufficiently encourage firms to comply with 
the law because they do not want to be perceived as ``bad actors'' 
relative to their competitors such that they might lose customers.\652\ 
Similarly, a nonprofit commenter stated its belief that individual 
lawsuits sufficiently deter violations of the law because an individual 
lawsuit can alert a company to its violation of the law as well as a 
class action lawsuit can. Accordingly, this commenter contended that 
class actions are not necessary to deter violations of the law.
---------------------------------------------------------------------------

    \652\ This comment also asserted that the savings clause in 
section 2 of the FAA, which permits arbitration agreements to be 
invalidated by generally applicable contract defenses such as 
``fraud, duress or unconscionability'' (Concepcion, 131 S.Ct. at 
1746), also protect consumers from bad conduct. The Bureau is not 
aware of any evidence to suggest that such defenses are widely 
available to consumers or that they address most harms that befall 
them and thus does not believe that exception to the FAA has any 
significant impact on its Findings with respect to whether the class 
rule is for the protection of consumers.
---------------------------------------------------------------------------

    Some industry commenters stated their belief that class actions 
were not necessary to deter violations of the law with respect to 
providers of certain products or services because the markets for these 
products or services have particular features which, in their view, 
encouraged full compliance by providers.\653\ A trade association 
representing debt collectors stated that because arbitration agreements 
may not always be written in such a way that the class action 
prohibition can be relied upon by a debt collector, whether a debt 
collector may be subject to class action liability is typically 
uncertain. Because of this uncertainty with respect to the arbitration 
agreements, the commenter stated that debt collectors fully comply with 
the law and thus that the threat of class actions does not serve to 
deter debt collectors. Several credit union and credit union 
association commenters asserted that their member-owned, not-for-profit 
cooperative structure provides adequate accountability incentives to 
fully comply with the law, such that the prospect of class actions are 
not necessary to deter them from violations of the law. Similarly, a 
community bank commenter stated that community banks are relationship-
oriented, and the need to develop customer relationships and retain 
customers provide an adequate incentive for them to comply with the 
law.
---------------------------------------------------------------------------

    \653\ A few of these commenters requested that they be excluded 
from the rule's coverage for this reason. These requests for 
exclusion are discussed below in Part VII in the section by section 
analysis to Sec.  1040.3.
---------------------------------------------------------------------------

    A few commenters challenged the examples the Bureau cited in the 
proposal (and summarized above in this Part VI.C.1) of companies that 
monitor class action lawsuits and adjust their conduct accordingly as 
supporting the Bureau's preliminary finding that class actions deter 
violation of the law. However, none of the commenters disagreed with 
the general observation that companies monitor class action litigation 
to minimize their class action exposure and at least one industry 
commenter agreed that doing so is a prudent business practice. One 
commenter criticized the Bureau's consideration of law firm alerts 
about class action cases concerning ATM fee notices pursuant to EFTA as 
evidence that class actions create deterrence because those cases were 
not analyzed as part of the class action litigation filings in the 
Study and because Congress has since amended EFTA such that the conduct 
at issue in those cases is no longer unlawful. That same commenter 
criticized the Bureau's citation to foreign currency litigation, 
contending that the only behavioral change companies made in response 
to that litigation was to add more consumer disclosure, which, in the 
commenter's view did not benefit consumers because disclosure is 
ineffective.
    In contrast, numerous individuals, consumer advocates, public-
interest consumer lawyers, nonprofits, and consumer lawyers and law 
firms agreed with the Bureau's findings that class action exposure 
deters wrongdoing and encourages others to comply with the law. One of 
these consumer advocate commenters suggested, as the Bureau 
preliminarily found, that the deterrent effect of class actions is 
their most potent benefit. Several of these commenters remarked that 
the public nature of class actions and class settlements deter 
wrongdoing. One consumer law firm commenter noted that companies often 
require notification to upper management and boards of directors about 
class actions because of their potentially large liability, emphasizing 
that such senior leaders are capable of changing the underlying 
policies at issue. By contrast, the commenter stated that individual 
actions are often resolved at lower levels of the company and that 
upper management may not be made aware of the problem. Academic 
commenters suggested that many named plaintiffs pursue classwide relief 
not so that they can be compensated but to prevent the company from 
harming similarly situated consumers in the future. Similarly, a 
public-interest consumer lawyer and consumer advocate suggested that 
class action exposure deters bad behavior and prevents harm to victims 
other than the named plaintiff. A consumer law firm commenter explained 
that class actions deter misconduct in ways that individual actions 
cannot. Similarly, a consumer advocate commenter stated that class 
actions are critically important not only for compensating victims of 
corporate law-breaking but also for the deterrent effect of civil 
litigation.
    Commenters also provided specific examples, from their personal 
experience, of deterrence. For example, two public-interest consumer 
lawyer commenters described class actions involving automobile dealer 
markups that resulted in an industry-wide agreement to put in place 
caps on compensation so as to avoid future litigation over this issue. 
A consumer advocate commenter cited examples of deterrence in the auto-
lending, payday loan, deposit account, and credit card industries.
    Commenters offered various explanations for why, in their view, 
class actions deter violations of the law. For example, a consumer 
advocate

[[Page 33287]]

asserted that the risk of damages and reputational harm from a class 
action helps deter wrongdoing. Similarly, a consumer law firm commenter 
suggested that the public nature of class actions provides an important 
deterrent effect against wrongdoing. Another consumer advocate stated 
that the civil justice system reinforces the efforts of regulatory 
programs aimed at preventing such harms before they can occur, and that 
the threat of incurring civil liability adds a complementary deterrent 
factor that can discourage individuals and businesses from breaking the 
law and engaging in other kinds of harmful behavior. A public-interest 
consumer lawyer commenter asserted that, if a company could block class 
actions, it may have a powerful incentive to engage in widespread 
violations of law that result in small, but significant, individual 
harms while benefiting the company significantly in the aggregate. The 
commenter further suggested that this incentive has led companies to 
act deceptively in small ways to reap additional profits.
    A consumer law firm cited to the Gutierrez overdraft case cited in 
the proposal and described above, asserting that it demonstrates how 
defrauding consumers over small amounts can increase a company's 
profits. The commenter noted that there was little risk to the company 
that adopted those practices because it had an arbitration agreement in 
its customers' contracts and few consumers noticed the fee practices at 
issue. When companies know consumers can sue in class actions regarding 
such conduct, the commenter said that they are deterred. A local 
government commenter explained that, in its experience, class actions 
have the potential of changing corporate policy. Two consumer advocate 
commenters asserted that deterrence works because of the risk of 
damages and reputational harm from a class action; when this risk is 
low, unfair or deceptive practices become easier to adopt. Similarly, 
another consumer advocate commenter stated that without the deterrent 
effect of class actions, companies' worse instincts are unleashed--they 
become more driven to maximize profits and executive compensation at 
the expense of protecting consumers. One public-interest consumer 
lawyer commenter provided examples specific to civil rights class 
actions, explaining that it viewed private class actions as critical to 
protect civil rights in the financial markets and that civil rights 
consumer class actions provide relief beyond the named plaintiff by 
remedying and deterring civil rights violations and systemic 
discrimination. Members of Congress cited to a fact sheet written by a 
consumer advocate regarding discrimination class actions. This fact 
sheet, which summarized others' work on the topic, asserted that 
individual discrimination cases are an unrealistic option for remedying 
discrimination because, among other reasons, it is expensive to prove 
institutional discrimination, and that class actions may be the only 
way to prove and remedy a pattern or practice of discrimination.\654\ 
Without class actions deterring companies, stated one consumer advocate 
commenter, financial services companies would be able to go on 
enriching themselves by breaking the law at the expense of their 
largely unsuspecting customers. A consumer law firm commenter stated 
that class actions force corporate decisionmakers to think twice before 
inflicting harms that would otherwise escape review if consumers could 
only proceed on an individual basis.
---------------------------------------------------------------------------

    \654\ See Center for Justice & Democracy, ``Fact Sheet: Civil 
Rights Class Actions: A Singularly Effective Tool to Combat 
Discrimination,'' (Jan. 6, 2014), available at https://centerjd.org/content/fact-sheet-civil-rights-class-actions-singularly-effective-tool-combat-discrimination.
---------------------------------------------------------------------------

    With respect to the Bureau's preliminary finding that precluding 
providers from using arbitration agreements to block class actions 
would better enable consumers to enforce their rights and obtain 
redress when their rights are violated by providers, many consumer 
advocate and consumer law firm commenters agreed. By contrast, many 
industry commenters asserted that the rule would lead companies to 
remove arbitration agreements from their contracts which would make it 
more difficult for consumers to obtain relief in arbitration, a forum 
that the commenters viewed as superior to litigation. As discussed 
above, however, some industry, research center, and State government 
and State attorneys general commenters asserted that consumers have 
adequate alternative means of obtaining relief, whether through the 
informal dispute resolution channel, pursuing individual disputes via 
litigation or arbitration or enforcement. Consumer advocate and 
nonprofit commenters disagreed with these assertions.
    Whether the rule will cause providers to remove arbitration 
agreements. With regard to the debate over whether adopting the class 
proposal would harm consumers by prompting providers to remove 
arbitration agreements from their contracts entirely, many industry 
commenters and a comment from a group of State attorneys general 
contended that providers would, in fact, remove arbitration agreements 
from their contracts and that depriving consumers of access to 
individual arbitration would harm them.\655\ With regard to the first 
point, these commenters asserted that providers incur significant costs 
in connection with providing arbitration to their customers. As 
examples, commenters cited the filing fees, hearing fees, and 
arbitrator compensation that providers often agree to pay when 
consumers file arbitrations against them. These commenters suggested 
that providers are not willing to pay these costs for individual 
arbitration unless they can use arbitration agreements to block class 
actions and thereby avoid class action defense costs. A few industry 
commenters argued that it is inevitable that companies would remove 
their arbitration agreements because it is economically impossible for 
companies to pay arbitration costs related to individual arbitration 
and also pay class action defense costs. Nevertheless, no commenter 
provided a specific accounting of providers' costs or any other 
concrete evidence to buttress these assertions.
---------------------------------------------------------------------------

    \655\ Separately, one industry commenter asserted that the 
combined effect of the class proposal and monitoring proposal would 
cause providers to drop their arbitration agreements. The impact of 
the monitoring proposal is discussed below in Part VI.D.
---------------------------------------------------------------------------

    This lack of evidence is particularly important because the Bureau 
stated in the proposal that it was skeptical that the class rule would 
cause providers to incur significant additional costs by maintaining 
``two tracks'' of dispute resolution (arbitration and court) given that 
many providers already maintain two tracks for dispute resolution in 
small claims court and arbitration and that few companies compel 
arbitration when an individual consumer first files in court. Several 
industry commenters explained why, in their view, the class rule would 
impose significant additional costs and why providers currently permit 
small claims court filings and rarely move to compel arbitration in 
individual litigation. A few industry commenters asserted that 
litigating disputes in both arbitration and small claims court is not 
substantially more burdensome for providers than litigating disputes 
only in arbitration, because small claims courts have many of the same 
streamlined procedures as arbitration, such as limits on discovery and 
individualized proceedings. Consequently, in the commenter's view, the 
fact that businesses litigate disputes

[[Page 33288]]

in both arbitration and small claims court does not indicate that they 
can afford to ``subsidize'' arbitration while paying class action 
defense costs (and therefore continue to maintain two tracks if the 
Bureau finalized the class rule). The commenter also disagreed that the 
Study showed that companies already maintain two tracks of litigation 
because they move to compel arbitration in only about 1 percent of 
individual cases filed in Federal court and about 5 percent of the 140 
cases against companies known to have an arbitration agreement. The 
commenter asserted that the Bureau's sample size of 140 cases is too 
small to draw the conclusion that companies rarely invoke arbitration 
agreements in individual litigation, although no commenter cited any 
evidence to the contrary. The commenter also argued that companies' low 
rate of invocation is not evidence of companies' willingness to 
litigate in both arbitration and court, because there are many reasons 
why a provider may not move to compel arbitration despite its 
preference for litigating disputes in arbitration, such as the consumer 
opting out of the arbitration agreement, a provider's offer of 
settlement, or the consumer's failure to prosecute the case.
    In response to the Bureau's skepticism in the proposal as to 
whether the costs of individual arbitration will cause providers to 
remove arbitration agreements if the class rule is finalized, other 
industry commenters noted that many arbitration agreements include 
``anti-severability provisions,'' which state that if the agreement's 
no-class provision is held unenforceable, the entire arbitration 
agreement is unenforceable as well.\656\ The commenters stated that 
through these anti-severability provisions, providers have already 
effectively chosen to eliminate their arbitration agreements if the no-
class provision is not available and thus the Bureau's skepticism is 
unfounded.
---------------------------------------------------------------------------

    \656\ Study, supra note 3, section 2 at 46-47.
---------------------------------------------------------------------------

    Whether loss of individual arbitration harms consumers. Numerous 
Congressional, industry, and research center commenters, as well as a 
group of State attorneys general asserted that arbitration is a 
superior form of dispute resolution for consumers relative to 
individual litigation and that consumers would therefore be harmed if 
the class rule causes providers to remove arbitration agreements from 
their consumer contracts. These commenters cited several factors in 
support of their argument. Many stated that arbitration is a superior 
forum for resolving individual disputes because filing fees are less 
expensive for consumers than comparable fees in court. For example, 
these commenters noted that the AAA's consumer arbitration rules 
require consumers to pay no more than $200 in costs for arbitration, 
and that many providers use arbitration agreements that require the 
provider to pay the consumer's entire filing fees in certain 
circumstances. In contrast, commenters noted that filing fees for 
individual suits in Federal court are $400, and that State court filing 
fees vary but are often more than $200. A research center noted that 
arbitration saves money for both consumers and businesses.
    Many of these same industry, research center, and State attorneys 
general commenters noted that individual disputes filed in arbitration 
are, on average, resolved more quickly than those filed in individual 
litigation. One industry commenter noted that arbitrations analyzed in 
the Study were resolved in a median of four to seven months, depending 
on whether the consumer appeared at the hearing and whether that 
hearing was in person or by telephone. By contrast, the commenter noted 
that the average time to reach trial for an individual suit filed in 
Federal court was 26.7 months.\657\ Several of these industry 
commenters further stated that many State courts have significant 
backlogs, thus increasing the time to resolution in those courts.
---------------------------------------------------------------------------

    \657\ U.S. Courts, ``Federal Judicial Caseload Statistics 
2016,'' (June 2016) available at http://www.uscourts.gov/statistics-reports/federal-judicial-caseload-statistics-2016.
---------------------------------------------------------------------------

    Many industry and research center commenters also stated their 
belief that arbitration is a better forum for consumers to resolve 
their disputes with consumer finance companies than individual 
litigation in court because consumers may proceed without an attorney 
in arbitration. These commenters believe that arbitration's streamlined 
process, which does not typically include motions or discovery practice 
common to litigation and has simpler pleading requirements, allows 
consumers to pursue their own claims without an attorney and are far 
lower than what one industry commenter asserted is the astronomical 
cost of litigation. Indeed, these commenters noted that the Study 
showed that unrepresented consumers more often received favorable 
decisions from arbitrators than did consumers represented by attorneys. 
On the other hand, one industry commenter asserted that when consumers 
do have an attorney in an arbitration, that attorney is likely to have 
prior arbitration experience. Some industry commenters and a group of 
State attorneys general noted that arbitration hearings were typically 
held in locations that were convenient for consumers and often occurred 
via telephone, Skype or email without the consumer having to appear in 
person. In contrast, these commenters noted that litigation typically 
requires consumers to appear in person and often during the day, 
requiring them to miss work. An industry and research center commenter 
and a group of State attorneys general noted that the arbitration 
process is simpler than litigation and therefore easier for consumers 
to navigate. Relatedly, an industry commenter noted that fees are 
modest and disclosed in arbitrations and that arbitrators may waive or 
reduce them further. An industry commenter asserted that arbitration is 
better than litigation because consumers can play a role in choosing 
their arbitrator, while they cannot choose a judge. An industry 
commenter and several State attorneys general asserted that arbitration 
benefits consumers because they are more likely to receive a decision 
on the merits as compared to class actions, where the Study showed no 
trials occurred in class actions.
    Many of the industry and research center commenters noted that the 
Study showed that consumers prevailed on their claims in arbitration at 
least as much as they did in litigation. They noted, for example, that 
the Study showed that consumers received a favorable decision from an 
arbitrator 6 percent of the time and settled with companies 57 percent 
of the time in arbitration (appearing to reflect data from the Study 
that identified known and likely settlements), while consumers received 
a favorable judgment in 7 percent of their claims in individual 
litigation and settled 48 percent of claims filed in court (appearing 
to reflect data from the Study that identified known settlements only). 
Many industry commenters and a group of State attorneys general further 
contended that successful consumers won significant amounts in 
arbitration; according to the Study, the average consumer who received 
a favorable award received more than $5,000 and a group of State 
attorneys general noted that arbitration agreements rarely limit 
consumers' recovery.
    Several of these same commenters also asserted that arbitration is 
at least as fair for consumers as litigation because the major 
arbitration administrators, AAA and JAMS, each have due process 
standards that require arbitrators to handle claims fairly. An industry 
commenter and a research

[[Page 33289]]

center both further noted that courts have authority under the FAA to 
invalidate arbitration agreements that impose unfair terms on 
consumers, such as those that limit consumers' right to recovery in 
ways not permitted by Federal or State law. In addition, these 
commenters noted that the Study found that few arbitration agreements 
contained provisions that these commenters thought were unfair to 
consumers on their face, such as those that required arbitration to 
occur in an inconvenient forum or that required the consumer to pay for 
all arbitration fees if the consumer failed to win the claim. 
Commenters additionally asserted that the majority of arbitration 
agreements contain provisions intended to ensure fairness for 
consumers, citing provisions such as those fully disclosing the 
arbitration process, allowing consumers to opt out of the arbitration 
agreement, and allowing consumers to file claims that meet the relevant 
claims limits in small claims court rather than be subject to 
arbitration. One industry commenter went further and asserted that 
arbitration is in fact more fair than the alternatives because disputes 
can be reasonably aired, considered, and resolved.
    Some industry and research center commenters asserted that 
individual arbitration is frequently and successfully used by both 
consumers and companies in other areas of the law, such as in 
employment, securities, and medical malpractice. They further contended 
that, given time, consumer finance arbitration can achieve the same 
levels of success.\658\ They did not state how much time would be 
required nor what should happen to consumers bound by arbitration now 
until that threshold is crossed. One industry commenter asserted that 
consumers are more satisfied but did not provide evidence supporting 
this claim nor did it explain what consumers were more satisfied with--
their provider or arbitration.
---------------------------------------------------------------------------

    \658\ A few commenters pointed out that the Bureau requires its 
employees to sign pre-dispute arbitration agreements and to 
arbitrate employment claims against the Bureau.
---------------------------------------------------------------------------

    Several industry and research center commenters stated that the 
loss of individual arbitration as an option for consumers is 
particularly problematic because, in their view, most injuries suffered 
by consumers in consumer finance cases are individualized and therefore 
could not be remedied through class action lawsuits, which are the 
focus of the Bureau's class rule. These commenters cited, as examples, 
cases in which an individual consumer had a deposit not properly 
credited at an ATM machine, was improperly charged a fee, or had 
incorrect interest calculations on his or her account when other 
consumers did not. One of these commenters stated that, in its opinion, 
such individualized non-classable claims are a significant majority of 
all consumer claims. However, the commenters did not provide any 
empirical evidence for their assertions that most injuries to consumers 
occur because of unique or individualized harms.
    Many of these same industry and research center commenters noted 
that without arbitration, many consumer finance claims may be filed in 
court. Specifically, they contended that small claims courts are not an 
adequate forum for these claims that would have been resolved in 
arbitration. While small claims courts ostensibly allow consumers to 
pursue low-value claims more simply than in State courts of general 
jurisdiction or in Federal court, these commenters cited evidence 
suggesting that small claims courts are overcrowded or closing as a 
result of budget cuts in some jurisdictions (citing examples in parts 
of California, Alabama, and Texas). The commenters further contended 
that to the extent that small claims courts are over-crowded (or non-
existent), they are slow in providing relief to consumers who are 
injured or do not provide relief at all. These commenters also pointed 
out that small claims courts typically require consumers to appear in 
person during standard working hours, which can be difficult for many 
consumers who cannot take time off from their jobs.\659\
---------------------------------------------------------------------------

    \659\ While many commenters asserted that individual arbitration 
is a superior form of dispute resolution to individual litigation, a 
few industry commenters asserted that individual arbitration is a 
superior form of dispute resolution to class litigation. One 
industry commenter noted that individual arbitration proceeded 
significantly more quickly than class litigation, stating that 
consumer arbitration was up to 12 times faster than class action 
litigation when comparing resolution on the merits in arbitration to 
a class settlement. Another industry commenter noted that 
arbitration hearings occurred significantly more often than do 
trials in litigation and thus asserted that arbitration claims were 
``heard on the merits'' more often than were claims in class action 
litigation. For example, hearings occurred in 30 percent of the 
arbitrations analyzed in the Bureau's Study whereas not one of the 
class actions analyzed in the Study went to trial (those cases ended 
by a plaintiff's withdrawal of claims, a settlement, or a dismissal 
by the court). The Bureau does not believe such a comparison is 
dispositive to an assessment of whether arbitration is better than 
litigation for resolving individual disputes. Moreover, even 
assuming that arbitration resolves claims more quickly than class 
litigation or holds hearings on the merits more often than class 
litigation, the Bureau believes that consumers and the public 
interest benefit more from the availability of class actions than 
from the availability of individual arbitration (for the few 
consumers who choose it), for all the reasons stated in this Part 
VI.C.1.
---------------------------------------------------------------------------

    Some industry commenters stated their belief that arbitration was 
particularly useful, as compared to litigation, for claims concerning 
certain products or services. For example, a debt collection industry 
trade association stated that in debt collection disputes, consumers 
place a particularly high value on confidentiality, which it believed 
arbitration better preserves. It also stated that debt collection 
claims are simpler to adjudicate, and thus suited to a simpler process, 
which it believed arbitration offers.
    On the other hand and as noted above in Part VI.B.2, consumer 
advocates, consumer lawyers, trade associations of consumer lawyers, 
public-interest consumer lawyers, consumer law firms, nonprofits, and 
many individual commenters commented at length as to why, in their 
view, litigation in court of individual disputes along with the 
availability of class actions was far preferable to pursuing the same 
claims in arbitration. Several of these commenters stated that industry 
preferred to funnel all disputes into individual arbitration not to 
benefit consumers but instead to insulate themselves from class actions 
and that they did not have consumers' best interest in mind when 
suggesting that arbitration was preferable.
    As discussed above in Part VI.B.1, many of these commenters further 
stated that individual arbitration was so unfair relative to individual 
litigation that the Bureau should have protected individual consumers 
by banning outright the use of pre-dispute arbitration agreements. For 
example, some commenters argued that consumer arbitration outcomes 
cannot be consistently fair because arbitration naturally favors 
providers, as repeat players, over consumers, who may only face an 
arbitration once. One public-interest consumer lawyer commenter argued 
that individual arbitration is necessarily worse for consumers than 
litigation because consumers cannot find legal representation and few 
consumers file arbitrations in any case. Accordingly, these commenters 
did not agree that a loss of individual arbitration, if it occurred in 
response to the Bureau's rule, would negatively impact consumers. 
Instead, many of these commenters thought that consumers would be 
better off without it.
    One industry commenter challenged an argument it believed was 
raised by some consumer advocates who it claims have asserted that the 
widespread

[[Page 33290]]

removal of pre-dispute arbitration agreements would not harm consumers 
because both sides would mutually agree to ``post-dispute arbitration'' 
(i.e., a voluntary agreement to arbitrate reached after a dispute has 
arisen).\660\ The commenter disagreed with this argument, asserting 
that parties are less likely to agree to post-dispute arbitration 
because they become invested in their positions and refuse to arbitrate 
and because attorneys discourage them from doing so in order to 
maximize attorney's fees in litigation. The commenter also asserted 
that post-dispute arbitration would be less attractive to consumers 
than pre-dispute arbitration because providers are unwilling to pay as 
many of the costs in such cases. In the commenter's view, post-dispute 
arbitration would therefore not replace pre-dispute arbitration, even 
where it is the most efficient option for both parties.
---------------------------------------------------------------------------

    \660\ The Bureau did not receive any comments from consumer 
advocates or others asserting this position, however.
---------------------------------------------------------------------------

Response to Comments and Findings
    The Bureau has carefully considered the comments received on these 
aspects of the proposal and further analyzed the issues raised in light 
of the Study and the Bureau's experience and expertise. Based on all of 
these sources and for the reasons discussed above in Part VI.B, in the 
proposal, and further below, the Bureau finds that precluding providers 
from blocking consumer class actions through the use of arbitration 
agreements would substantially strengthen the incentives for companies 
to avoid legally risky or potentially illegal activities, thereby 
reducing the likelihood that consumers would be subject to such 
practices in the first instance. To the extent that companies 
nonetheless engage in unlawful conduct, permitting class actions would 
also 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. For these reasons and those discussed 
below, the Bureau finds that both of these results are for the 
protection of consumers.
    Deterrence. With respect to commenters that contended that class 
actions do not deter wrongdoing because, in practice, companies face 
pressure to settle class actions whether or not they are meritorious, 
the Bureau does not agree that the conclusion follows from the premise. 
As discussed above in Part VI.B.3 and below in the Section 1022(b)(2) 
Analysis in Part VIII, the Bureau understands that there is some 
pressure to settle class action lawsuits given attorney's fees and the 
potential of a large verdict. At the same time, plaintiff's attorneys 
have an incentive to bring cases with the greatest likelihood of 
success since the amount they can secure in fees will be affected, at 
least in part, by the amount they are able to obtain for the class. 
Precisely because all that is true, companies that face the threat of 
class actions will have an incentive to avoid being sued and to reduce 
the expected value--and thus the likely settlement costs--of any suits 
that are filed. That, in turn, means that the potential for class 
action litigation creates an incentive for companies to rigorously 
adopt compliance measures and to avoid legally risky practices. While 
compliance with the law may not fully insulate a company from the 
threat of a class action lawsuit, failing to comply with the law would 
almost certainly increase the likelihood that company will be sued and 
the value of the claims asserted. Thus, because the Bureau believes 
that the likelihood of being sued in a class action and the expected 
value of class claims are inversely proportional to the efforts a 
company makes to assure compliance with the law, then it necessarily 
follows that an increased risk of class action litigation will 
incentivize companies to improve compliance efforts.
    An example of this deterrent effect can be found in comments from a 
credit reporting agency that provides credit monitoring and a consumer 
data trade association representing providers of credit monitoring. 
These commenters contended that two Federal appellate courts have 
improperly interpreted CROA to apply to at least one credit monitoring 
product.\661\ As discussed in more detail in the section-by-section 
analysis of Sec.  1040.3(a)(4) below in Part VII, among the 
requirements that CROA imposes on credit monitoring are a disclosure to 
potential consumers, waiting three days before commencing the services 
with a right of cancelation for the consumer, and prohibiting pre-
payment of fees.\662\ CROA further provides for statutory damages for 
violations of the statute that amount to disgorgement of the fees paid 
for the product.\663\ In the view of these commenters, if they were 
subject to CROA, they would face significant risk of class action 
exposure for what the commenters referred to as ``technical'' 
violations of CROA's requirements. These companies currently offer 
credit monitoring services that would not meet CROA's requirements if 
they were applied to them. They contend that they would be forced to 
increase their prices and there is a possibility they would not be able 
to offer credit monitoring services if they had to comply with CROA's 
requirements because doing so would be infeasible both practically and 
financially. Further, they believe they are able to offer these 
services without significant risk now because they include arbitration 
agreements in their consumer contracts, thus insulating them from class 
action liability. Setting aside, for the moment, the legal question of 
whether CROA does apply to credit monitoring and if it did, the policy 
question of whether these companies should be able to offer credit 
monitoring services to consumers without complying with CROA,\664\ 
these comments suggested that the prospect of class action liability 
would alter how these companies approach providing their product. In 
other words, their ability to insulate themselves from CROA class 
action liability has caused them to offer a service that the companies 
fear courts could hold violates CROA. Were they to lose that 
insulation, they say they will be deterred from offering that service.
---------------------------------------------------------------------------

    \661\ Stout v. Freescore, LLC, 773 F.3d 680, 686 (9th Cir. 
2014); Zimmerman v. Puccio, 613 F.3d 60, 72 (1st Cir. 2011).
    \662\ Credit Repair Organizations Act (CROA), 15 U.S.C. 1679 et 
seq.
    \663\ 15 U.S.C. 1679g(a)(1)(B).
    \664\ That issue is addressed more fully below in Part VII in 
the section-by-section analysis of Sec.  1040.3, in which the Bureau 
responds to the CRA's request for an exception to the class rule.
---------------------------------------------------------------------------

    As another example, debt collector commenters noted that debt 
collectors do not underinvest in compliance because the presence of 
class action waivers does not provide enough certainty to them that 
they will be always able to minimize class action liability. The Bureau 
believes that one corollary of this argument is that some debt 
collectors could be encouraged to spend less on compliance if they had 
more certainty about their ability to block class actions. To the 
extent this is true, the Bureau believes that debt collectors would be 
less deterred if they were more certain that they could block class 
actions, and conversely would be more deterred if they knew with 
certainty that they could not block class actions.
    As for the commenter that criticized the behavioral relief in the 
foreign currency fee litigation as worthless because disclosures 
provided about these fees are ineffective, the Bureau first notes that 
Congress believes in the importance of timely and understandable 
disclosures for

[[Page 33291]]

consumers.\665\ In addition, the Bureau notes that, following 
settlement of the foreign currency fee cases, the number of credit 
cards charging fees for foreign currency transactions decreased 
dramatically.\666\ Based on the Bureau's understanding of this 
industry, it believes that had companies not agreed to disclose these 
fees, the competitive pressure to eliminate them would have been lower. 
In any event, the Bureau cited the foreign currency fee class action 
settlements in the proposal as evidence of deterrence because those 
settlements caused issuers to disclose their exchange fees. The fact 
that other companies changed their practices is evidence of the 
deterrent effect, even if some commenters disagreed that disclosure of 
such fees is beneficial. Along the same lines, in response to the 
commenter that claimed the overdraft settlements did not deter such 
behavior because a few banks have not changed their overdraft practices 
following the wave of class action litigation, the commenter itself 
admitted that the litigation has encouraged most banks to change their 
overdraft practices. This bolsters the Bureau's finding that those 
class actions deterred banks from further violations of the law with 
respect to their overdraft practices, even if there are some banks that 
did not change their practices. Indeed, perfect compliance with the law 
is unlikely to be achieved through any mechanism, whether agency 
enforcement or class action litigation.
---------------------------------------------------------------------------

    \665\ See Dodd-Frank section 1021(b) (``The Bureau is authorized 
to exercise its authorities under Federal consumer financial law for 
the purposes of ensuring that . . . consumers are provided with 
timely and understandable information to make responsible decisions 
about financial transactions'').
    \666\ Sienna Kossman, ``Survey: More Cards Bid Farewell to 
Foreign Transaction Fees,'' CreditCards.com (March 31, 2015), 
available at http://www.creditcards.com/credit-card-news/foreign-transaction-fee-survey.php (finding that, from 2012 to 2015, ``the 
eight issuers that charge foreign transaction fees on at least some 
of their consumer cards have increased the total number of fee-free 
cards from 21 to 38.'').
---------------------------------------------------------------------------

    With these examples, as well as the EFTA ATM ``sticker'' litigation 
example discussed in the proposal and above,\667\ the Bureau disagrees 
with industry commenters that assessments as to the value to consumers 
of particular protections afforded by the law are relevant to the 
question of whether or not class actions have a deterrent effect.\668\ 
Instead, these examples illustrate the broader principle that companies 
have altered or would alter their behavior in response to class action 
exposure. To the extent that the commenters were really trying to argue 
that the underlying laws provide no benefit to consumers, that argument 
is addressed separately below.
---------------------------------------------------------------------------

    \667\ In 1999, Congress amended the EFTA to require that ATM 
operators make disclosures about ATM fees to be charged consumers, 
both (1) ``on or at'' the ATM itself (usually a sticker on the 
machine) and (2) on the screen of the ATM during the transaction or 
on the receipt after the transaction. This EFTA amendment made ATM 
operators liable for actual and statutory damages in individual and 
class cases if consumers did not receive both disclosures. A number 
of class actions were filed and settled on the grounds that the ATM 
operator had failed to comply with the ``on or at'' requirement 
because the ATM sticker was missing. In 2012, Congress amended EFTA 
again to eliminate the ATM sticker requirement, and in 2013, the 
Bureau issued a final rule implementing this amendment.
    \668\ The Bureau notes that the EFTA ATM sticker requirements 
are no longer in place. A few commenters criticized the fact that 
the Bureau cited EFTA ATM sticker cases in the proposal as an 
example of companies changing their behavior in response to class 
action lawsuits because cases related to that conduct were not 
included in the Study. The fact that those cases were not included 
in the Study is irrelevant--the salient point is that companies 
changed their behavior in response to class action lawsuits being 
filed and thus that those cases deterred companies from violating 
EFTA in that regard.
---------------------------------------------------------------------------

    Indeed, the Bureau notes that while some industry commenters 
resisted the premise that potential class action liability produces 
deterrent effects, other industry, individual, and research center 
commenters agreed with the Bureau's finding and supplied additional 
evidence in support of it. One such individual commenter (who otherwise 
strongly opposed the proposal) agreed that class actions have the 
ability to ``prompt `enterprise-wide change' '' in providers. 
Similarly, one of the studies cited by industry and research center 
commenters that analyzed the results of class action lawsuits included 
interviews of corporate representatives regarding class action 
liability in which those representatives acknowledged that ``damage 
class action lawsuits have played a regulatory role by causing them to 
review their financial and employment practices.'' \669\ Furthermore, 
upon issuance of the Bureau's proposal, several law firms advised their 
clients to review their compliance given the possibility of the Bureau 
finalizing the proposal and the clients' subsequent increased risk of 
class actions.\670\ As one firm advised:
---------------------------------------------------------------------------

    \669\ Deborah R. Hensler, et al., ``Class Action Dilemmas: 
Pursuing Public Goals for Private Gain,'' at 9 (Mar. 24, 1999) (RAND 
Inst. for Civil Just.).

    \670\ Jones Day LLP, ``CFPB Proposes New Rule on Mandatory 
Consumer Arbitration Clauses,'' (May 2016), available at http://www.jonesday.com/cfpb-proposes-new-rule-on-mandatory-consumer-arbitration-clauses-05-16-2016/ (in an alert regarding the potential 
impact of the proposal, instructed companies subject to Bureau 
regulation to ``[c]onduct a review of your compliance management 
system. 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.''); Paul Hastings LLP, ``Class (Not) 
Dismissed: CFPB Proposes New Rule Prohibiting Mandatory Arbitration 
Clauses, Encourages Consumer Class Action Law Suits,'' (May 12, 
2016), available at https://www.paulhastings.com/publications-items/details/?id=8e53e969-2334-6428-811c-ff00004cbded (stating that 
``CFPB-regulated entities should consider the following action 
items,'' including ``review[ing] customer complaint logs to identify 
those products and services that elicit the most frequent consumer 
complaints and could potentially serve as the basis for consumer 
class action lawsuits''); Venable LLP, ``The CFPB's New Arbitration 
Clause Ban: How to Prepare Your Organization,'' (June 15, 2016), 
slide 31, available at https://tinyurl.com/l32qjdb (analyzing what 
the proposed rule ``mean[s] for regulatory compliance'' and advising 
entities to ``assess litigation exposure,'' ``assess recourse 
available to consumers,'' ``know the terms of your contract,'' and 
``consider product and service enhancements''). These law firm 
alerts were preceded by others before the issuance of the proposal 
providing similar advice to companies to improve their compliance 
management and systems in anticipation of the rule. 81 FR 32830, 
32862-63 (May 24, 2016). A compliance firm similarly advised its 
clients to ``batten down the hatches'' by taking steps to ``mitigate 
the flow of class actions.'' See Treliant Risk Advisors, ``Pre-
dispute Arbitration Clauses: Batten Down the Hatches,'' available at 
https://www.treliant.com/News-and-Events/New-Coordinates-Newsletter/NC-Articles-Details/ArticleID/27227 (Summer 2016) (listing several 
steps firms can take to reduce risk, including that they should 
``analyze complaints . . . to identify [compliance] problems'' and 
to ``complete thorough root cause analysis for any concerning 
trends'').

    Affected companies should use this time, before implementation, 
to mitigate class action claims that previously might have been 
subject to arbitration. Companies should consider a review of all 
consumer-facing documents to confirm language complies with 
applicable federal and state law. Additionally, internal policies 
and procedures must be reviewed to ensure that product origination 
and servicing is consistent with all legal requirements. Likewise, 
vendor agreements must be reviewed in relation to applicable law--
including, most importantly, principal-agency theories. It is 
imperative that companies anticipate ways to limit liability and 
manage future class action risks now--as class action defense 
litigation spending is anticipated to surge in every consumer 
finance sector.\671\
---------------------------------------------------------------------------

    \671\ Katten Muchin Rosenman LLP, ``CFPB Issues Proposed Rule to 
Restrict Use of Mandatory Arbitration Clauses and Class Action 
Waivers,'' (May 16, 2016), available at https://www.kattenlaw.com/CFPB-Issues-Proposed-Rule-to-Restrict-the-Use-of-Mandatory-Arbitration-Clauses-and-Class-Action-Waivers.

    One industry commenter asserted that class actions create over-
deterrence because class settlements may encourage companies to avoid 
behavior that is legally ambiguous but not necessarily unlawful.\672\ 
To the extent

[[Page 33292]]

that the comment was referring to the ``over-deterrent'' effect as to a 
company that engaged in the legally ambiguous behavior and that was 
sued because of it, the Bureau notes that the company was not deterred 
by the threat of class action liability to the extent that it did, in 
fact, engage in the behavior that was the subject of the class 
complaint. Accordingly, a company that takes the risk of engaging in 
conduct that may violate an ambiguous or uncertain law was neither 
deterred nor ``over-deterred.'' To the extent that the comment was 
referring to an ``over-deterrent'' effect as to that same company once 
it chooses to stop engaging in the behavior that generated the class 
action settlement or as to other companies that become aware of the 
settlement and avoid similar behavior, the Bureau understands that the 
prospect of class action liability may, at the margins, deter some 
conduct that is legally ambiguous but not necessarily illegal. But, 
even if at the margins, the effect of the class rule would be to deter 
conduct that may be legal from occurring, the Bureau believes that, on 
balance, that would be a reasonable cost to achieve the benefits of the 
rule for the public and consumers. Moreover, the Bureau believes that 
most providers consult attorneys to assess the legal risk of engaging 
in particular conduct and that providers likely have different levels 
of tolerance for the legal risk that arises from engaging in conduct 
that is legally ambiguous.
---------------------------------------------------------------------------

    \672\ The Bureau adopts this definition of ``over-deterrence'' 
(i.e., deterring legally ambiguous and potentially lawful behavior) 
solely for purposes of addressing the argument raised by the 
commenter. In economic terms, the existence of over-deterrence would 
generally imply that providers were responding to the deterrent 
(class actions) by taking actions where the costs (e.g., foregone 
profits) exceed the social benefits (e.g., avoided harm to 
consumers). That is, over-deterrence leads to more compliance than 
is socially optimal, regardless of the exact legal status of the 
conduct. As discussed in the Bureau's Section 1022(b)(2) Analysis in 
Part VIII below, the Bureau believes that in general the level of 
compliance in consumer financial products is below the optimal 
level, although there may be exceptions for particular firms in 
particular markets.
---------------------------------------------------------------------------

    Moreover, as discussed in more detail in Part VI.B.3 above, there 
is a relationship between the likelihood of success on class action 
claims and the amount of the settlement. For this reason, the Bureau 
believes, all else equal, that a class action that asserts legally 
ambiguous but not clearly unlawful claims is likely to result in a 
smaller settlement, if any, than a class action that asserts a clear 
violation of the law. As a result of a smaller settlement amount, the 
deterrent effect of a settlement with regard to a legally ambiguous or 
uncertain claim would be correspondingly smaller than the deterrent 
effect of a larger settlement. In other words, class action settlements 
involving ambiguous or uncertain violations of the law may deter some 
lawful conduct at the margins, but the Bureau does not believe this 
deterrent effect would be significant. And, even if there is some small 
impact from these settlements on legally ambiguous but not unlawful 
behavior, the Bureau believes that, on balance, that it would be a 
reasonable cost to achieve the benefits of the class rule for the 
public and for consumers.\673\ As to the research center commenter that 
contended that bad actors are likely not deterred from violations of 
the law because they are judgment proof, the commenter offered no 
evidence to support that most or all providers that violate the law are 
judgment proof. In any event, the Bureau believes for all of the 
reasons stated above that the prospect of class action liability deters 
violations of the law for providers that are not judgment proof, 
regardless of whether some judgment proof defendants may not be 
deterred.
---------------------------------------------------------------------------

    \673\ The Bureau notes that it similarly finds below, in Part 
VI.C.2, that even if the class rule may, at the margin, the deter 
certain innovations from occurring, the Bureau believes that, on 
balance, that would be a reasonable cost to achieve the benefits of 
the rule for the public and consumers.
---------------------------------------------------------------------------

    With respect to the industry commenters that contended that 
statutes providing for statutory damages or double and treble damages 
compound the pressures to settle and thus create a deterrent effect 
that is imprecise or inefficient, the Bureau does not dispute that the 
existence of statutory damages or attorney's fee provisions may 
encourage lawsuits under those statutes. Some commenters contended this 
is ``imprecise'' or ``inefficient.'' It is nevertheless a direct 
consequence of the statutory regime adopted by Congress and the States 
and, if anything, is evidence that lawmakers chose to emphasize the 
need for compliance with these laws. As for the commenter that 
suggested that class actions are an inefficient policymaking tool, the 
Bureau disagrees that class actions constitute policymaking themselves. 
Rather, the Bureau believes that class action settlements occur only 
because Federal and State legislatures had already adopted policy 
choices by enacting particular statutes or the common law had developed 
to reflect certain policy judgments. In response to the commenter that 
suggested that the Bureau should determine which conduct is unfair or 
deceptive because that would be more efficient than class actions, the 
Bureau's resources are limited, for all of the reasons discussed above 
in Part VI.B.5. For this reason, even if such a practice were more 
efficient than unfettered class actions, the Bureau has many competing 
priorities and likely would not be able to identify and communicate 
every type of unfair or deceptive practice for the many thousands of 
products or services within its jurisdiction.
    As for commenters that contended that statutory damages were 
designed to incentivize individual claims and are misapplied when 
asserted in class actions, the Bureau does not agree that the class 
action liability that results under statutes that provide for statutory 
damages is unintended or accidental. Instead, and as discussed more 
fully in Part II.C, Congress has repeatedly enacted measures to address 
the interaction of statutory damages and the class action mechanism, as 
evidenced by its adoption of classwide damages caps for many 
statutes.\674\ The statutory regimes enacted, including whether the 
statute allows for class action liability, reflect policy decisions by 
Congress. Commenters may disagree with those decisions, but it is 
Congress who makes them, not the Bureau. In any event, as discussed 
below in Part VI.C.2 and in the Study, most of the consumer credit 
protection statutes cap statutory damages.
---------------------------------------------------------------------------

    \674\ See infra note 740 (classwide statutory damage caps).
---------------------------------------------------------------------------

    Similarly, commenters that criticized the underlying statutes as 
incentivizing private lawsuits when the commenters claim there is ``no 
harm to deter'' are, in essence, either claiming that courts will allow 
the lawsuits to proceed despite the absence of an in injury-in-fact 
(which the Constitution requires for Federal court litigation \675\) or 
are expressing concern about the measure of damages for injuries that 
these commenters asserted to be minor. As to the first, Federal courts 
have repeatedly considered what it means for a plaintiff to establish 
individual, concrete harm in order to have standing to assert a claim 
for statutory damages. Indeed, the Supreme Court recently addressed the 
issue.\676\ The judicial system can and does address whether plaintiffs 
must suffer harm in order to allege the violation of a statute; the 
Bureau is not in the position to make such assessments in the context 
of this rulemaking. As to the second, these

[[Page 33293]]

commenters may be disagreeing, to some extent, with Congressional 
decisions about the remedies for certain harms. For example, commenters 
cited many statutes that they believe create violations of law and 
large penalties without any corresponding harm to consumers. Those 
statutes include FACTA requirements for printing credit card numbers on 
receipts that apply to merchants, a now-repealed EFTA requirement 
concerning ATM fee notices, TCPA restrictions concerning unsolicited 
telephone calls, California disclosure requirements for automobile 
purchases, and CROA, which concerns credit repair products and provides 
for the remedy of disgorgement of fees paid. While commenters may 
disagree that unwanted telephone calls, the printing of credit card 
expiration dates on receipts, or the failure to disclose certain terms 
of automobile purchase transactions harm consumers, Congress and the 
State legislatures have the authority to make those judgments and set 
the remedies for the harms it chooses.
---------------------------------------------------------------------------

    \675\ Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 
(1992).
    \676\ Spokeo, Inc. v. Robbins, 136 S. Ct. 1540, 1549 (2016) 
(affirming that injury to a legal interest must be ``concrete'' as 
well as ``particularized'' to satisfy the injury-in-fact element of 
standing and because Congress is ``well positioned to identify 
intangible harms that meet minimum Article III requirements, its 
judgment is . . . instructive and important.'').
---------------------------------------------------------------------------

    With respect to CROA, as discussed below, since 2005, there have 
been a number of efforts in Congress to determine whether CROA could be 
improved by clarifying the CROA credit monitoring coverage issue that 
commenters raised here. No consensus has been reached to date and the 
FTC has twice expressed concern about the difficulty in structuring a 
revision to CROA to address this concern. This history suggests that 
the author of CROA (Congress) and its enforcer (the FTC) are not 
certain CROA should be revised, or how. In any event, with respect to 
CROA and all statutes, it is Congress that sets the remedies and 
determines coverage for its statutory regimes. Further, though some 
providers may currently be able to block class actions under these 
statutes through their use of arbitration agreements, these statutes 
nevertheless govern providers' conduct and those providers who violate 
the law may be subject to individual claims. In short, to the extent 
that commenters believe class actions provide outsized liability under 
particular statutes without requiring proof of any real harm to 
consumers, courts, Congress, and State legislatures are presumptively 
the proper branches of government to address this concern.
    Relatedly, one research center commenter cited the Overdraft MDL 
class settlements as examples of violations of the law where consumers 
were not harmed. In fact, in the commenter's view, consumers received a 
benefit from the violations, because the fees generated by those 
overdraft practices enabled the banks to offer free checking accounts 
to its customers. Whether those overdraft policies generated revenue 
from overdrafters that subsidized free checking accounts for consumers 
generally is beside the point; when companies violate the law, the 
consumers who are victims of the wrong are better protected and 
accountability is improved when there is an effective remedy, 
regardless of how the company may have invested the profits from those 
violations. If companies were excused from violating the law because 
doing so allowed them to charge lower prices, they could, for example, 
justify charging higher prices to a certain race or gender in order to 
subsidize lower prices to other groups. The Bureau does not believe 
such a result would protect consumers and likewise does not agree that 
the overdraft settlements harmed consumers in the way the commenter 
suggested. To the contrary, the Bureau believes that consumers 
benefitted from these aspects of the overdraft settlements, which 
resulted in more transparent upfront pricing that facilitates 
comparison shopping by consumers.
    For all of the reasons stated, the Bureau finds that class action 
settlements are not wholly random and are sufficiently correlated to 
merit to deter wrongdoing. The Bureau also does not agree that the 
deterrence provided by class actions is limited to those cases that 
result in class settlements or even those that are filed at all. Mere 
exposure to the potential to be sued for a meritorious class action, in 
the Bureau's view, creates an incentive to refrain from the conduct 
that would give rise to that action. As one commenter noted, the 
exposure to potential liability based on cases filed against other 
companies often put upper management and boards of directors on notice 
of widespread misconduct in a way that individual cases are unlikely to 
do. To appreciate the potential for such a suit, it is not necessary 
for a company to be aware that another company engaged in the same 
conduct and was sued.\677\ The Bureau therefore adopts its preliminary 
findings, as further elaborated here, with respect to the fact that 
class actions deter violation of the law.\678\
---------------------------------------------------------------------------

    \677\ Although, as discussed above, the fact that providers 
monitor such filings in order to determine whether adjustments in 
their practices may be advisable demonstrates that the deterrence 
incentives are meaningful.
    \678\ The Bureau notes that one commenter requested that the 
Bureau commit, if the rule is finalized, to revisit the rule and 
determine if an increase in frivolous lawsuits occurs as a result. 
The Bureau notes that it regularly monitors and receives feedback 
from interested stakeholders on all of the rules that it 
administers. However, it is premature for the Bureau to decide 
whether it will conduct an assessment of this final rule pursuant to 
Dodd-Frank section 1022(d), similar to what it has announced 
recently regarding certain other final rules.
---------------------------------------------------------------------------

    In response to commenters that contended that there is no need for 
the deterrence provided by class actions because companies are fully 
deterred from violating the law by the threat of public enforcement, 
the threat of individual litigation, the threat of consumers taking 
their business elsewhere, or by Tribal regulation and enforcement, the 
Bureau explained why each of these is insufficient in enforcing the law 
above in Part VI.B. To the extent these other mechanisms do not allow 
for sufficient enforcement of the law they also do not sufficiently 
deter companies from violating the law. As discussed there, the Bureau 
finds these avenues both individually and jointly insufficient to fully 
enforce the consumer protection laws.
    Moreover, the Bureau has observed, through its experience and 
expertise that there is not full compliance with the law. Indeed, 
despite the Bureau's creation and subsequent work, it continues to 
receive thousands of complaints per month and regularly uncovers 
wrongdoing that has not been deterred simply by the existence of the 
Bureau or the threat of individual dispute resolution, whether formal 
or informal. Further, the Bureau does not believe that the wrongdoing 
it uncovers is the only wrongdoing that exists, in part because the 
markets for consumer financial products and services are numerous and 
often large, and the Bureau's work is necessarily limited by its 
resources. Thus, the Bureau finds that the commenters' assertion that 
all providers comply fully with all applicable laws to be unsupported.
    As for those commenters that suggested that specific types of 
providers--such as debt collectors, credit unions, and community 
banks--have sufficient incentives because of the nature of their 
particular product or service to comply fully with the law, the Bureau 
does not find evidence that these entities are sufficiently deterred 
from violation in a way that warrants their exclusion from the class 
rule. With respect to debt collectors, commenters noted that whether 
debt collectors can rely on arbitration agreements is uncertain. This, 
they contend, means that they already sufficiently invest in 
compliance. Accordingly, while debt collectors may have more incentive 
to comply with the law than providers that are certain that they can 
block class actions, debt collectors still have less incentive to 
comply than providers that

[[Page 33294]]

do not include arbitration agreements in their contracts at all. In 
other words, while the legal uncertainty with respect to the ability of 
debt collectors to rely on arbitration agreements to block class 
actions suggests they may be somewhat more deterred from violations of 
the law than providers who are certain that they can do so, the Bureau 
believes that debt collectors will be further deterred from violations 
of the law once the class rule takes effect and debt collectors are 
certain that they may not rely on arbitration agreements to block class 
actions. With respect to credit unions, the Bureau does not believe 
that member ownership is a sufficient compliance incentive to replace a 
right to enforce the relevant laws on a class basis, in part because 
the members of a credit union are not necessarily aware of legal harms 
and thus may be unable to use the membership structure to hold their 
credit union providers to account. Moreover, even when consumers are 
aware, credit union customers do not necessarily engage in active 
efforts to hold management of the credit union accountable, such as by 
attending annual meetings.\679\ Just as an individual consumer is very 
unlikely to bring formal legal action over a small-dollar harm, a 
credit union customer is not necessarily likely to know about 
membership accountability mechanisms much less to spend the time and 
effort to coordinate a campaign to use them to hold a credit union 
accountable for small-dollar harms.\680\ Further, even if credit union 
customers do participate in the accountability process, very few are 
likely to exercise their vote on this basis alone, particularly over 
small-dollar harms. Indeed, the Bureau has observed violations of the 
law by credit unions with respect to their members.\681\ For similar 
reasons, the Bureau further believes that the presence of a financial 
institution in a community, with the interest of developing and 
retaining customers in that community, also is not a sufficient 
compliance incentive to replace a right to enforce relevant laws on a 
class basis.
---------------------------------------------------------------------------

    \679\ Robert F. Hoel, ``Power and Governance: Who Really Owns 
Credit Unions,'' at 25 (Filene Research Institute 2011), available 
at https://filene.org/assets/pdf-reports/244_Hoel_Power_Governance.pdf.
    \680\ Although Appendix A to the Proposal identified several 
class action settlements from the Study involving credit unions 
related to products and services that would be covered by the rule 
(i.e., excluding EFTA ATM ``sticker'' litigation), industry 
commenters did not point to any efforts by customers at these or 
other credit unions to hold the credit union accountable through 
membership accountability mechanisms.
    \681\ E.g., Press Release, Bureau of Consumer Fin. Prot. ``CFPB 
Orders Navy Federal Credit Union to Pay $28.5 Million for Improper 
Debt Collection Actions,'' Oct. 11, 2016, available at https://www.consumerfinance.gov/about-us/newsroom/cfpb-orders-navy-federal-credit-union-pay-285-million-improper-debt-collection-actions/; Tina 
Orem, ``12 Credit Unions Face Overdraft Suits,'' Credit Union Times 
(Jan. 5, 2016), available at http://www.cutimes.com/2016/01/05/12-credit-unions-face-overdraft-suits. See generally NCUA, 
``Administrative Orders,'' available at https://www.ncua.gov/regulation-supervision/Pages/rules/administrative-orders.aspx 
(listing dozens of government enforcement actions against credit 
unions each year).
---------------------------------------------------------------------------

    Moreover, in the period since the Bureau released the proposal, 
several more large-scale violations of consumer finance law have become 
public. In one example discussed above, the Bureau fined a large bank 
$100 million for widespread illegal practices related to the opening of 
thousands of unauthorized accounts on behalf of its customers.\682\ The 
Bureau's order in this case addressed unfair and deceptive conduct 
between 2011 and the date of the order. The existence of the Bureau and 
the threat of enforcement and supervisory actions evidently did not 
deter employees of the bank from routinely opening unauthorized 
accounts on behalf of its customers. Nor did the prospect of individual 
lawsuits or the threat of losing customers apparently deter the bank's 
employees from that conduct.
---------------------------------------------------------------------------

    \682\ Press Release, Bureau of Consumer Fin. Prot., ``Consumer 
Financial Protection Bureau Fines Wells Fargo $100 Million for 
Widespread Illegal Practice of Secretly Opening Unauthorized 
Accounts,'' (Sept. 8, 2016), available at http://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-fines-wells-fargo-100-million-widespread-illegal-practice-secretly-opening-unauthorized-accounts/.
---------------------------------------------------------------------------

    Another example involved a large money transmitter that recently 
agreed to a $586 million settlement with several public enforcement 
agencies, including the FTC and the Department of Justice. In that 
settlement, the money transmitter admitted to criminal and civil 
violations of the law involving aiding and abetting massive wire fraud 
by its agents.\683\ As the complaint in this case demonstrates, the 
money transmitter not only failed to meet legal requirements to 
maintain an effective anti-money laundering program but also appeared 
to ignore ample evidence gathered through its complaint system (i.e., 
its mechanism for resolving informal disputes) that indicated the 
extent of the problem.\684\
---------------------------------------------------------------------------

    \683\ Press Release, Fed. Trade Comm'n, ``Western Union Admits 
Anti-Money Laundering Violations and Settles Consumer Fraud Charges, 
Forfeits $586 Million in Settlement with FTC and Justice 
Department,'' (Jan. 19, 2017), available at https://www.ftc.gov/news-events/press-releases/2017/01/western-union-admits-anti-money-laundering-violations-settles.
    \684\ The complaint in this case detailed how the company had 
gathered 550,928 complaints of fraudulent money transfers involving 
$632 million. The complaints allowed the company to identify 
particular agents that should have made the company aware of the 
agents who were likely implicated in fraudulent transfers. The 
company not only ignored these complaints on an individual basis but 
also did not take steps to eliminate the fraudulent agents from its 
network. See Complaint at ]] 18-19, FTC v. The Western Union Co., 
No. 17-00110 (M.D. Pa. Jan. 17, 2017), https://www.ftc.gov/system/files/documents/cases/western_union_complaint-jan2017.pdf.
---------------------------------------------------------------------------

    In general, the Bureau disagrees with commenters that stated that 
the Bureau should have further studied current levels of compliance in 
the marketplace. The Bureau's supervision function has the purpose of 
assessing compliance and remedying non-compliance either through 
supervisory resolutions or through referral of cases for public 
enforcement actions. The Bureau's enforcement function investigates 
cases where there is reason to believe violations are occurring and 
pursues those where the evidence warrants doing so. It would not be 
practical to somehow study compliance levels independent of the work 
the Bureau does on an ongoing basis through supervision and 
enforcement, nor would the Bureau expect companies to be forthcoming 
with evidence of non-compliance were the Bureau to attempt such a 
study.
    With respect to the Bureau's preliminary finding that precluding 
providers from using arbitration agreements to block class actions 
would better enable consumers to enforce their rights and obtain 
redress, some commenters suggested that the other means do sufficiently 
remedy all violations of law. Those comments are discussed in above in 
Part VI.B. Otherwise, no commenters disagreed with the Bureau's 
findings in this regard and the Bureau adopts these findings with 
respect to the final class rule.
    Whether the rule will cause providers to remove arbitration 
agreements. The Bureau is not persuaded by the industry commenters' 
claims that, if the Bureau's rule goes into effect, providers 
inevitably would remove their pre-dispute arbitration agreements 
because they would be unwilling to subject themselves to the costs of 
arbitration while simultaneously being exposed to class action defense 
costs. Once the Bureau's rule goes into effect, class actions will 
become available to all consumers. Thus, the relevant question is 
whether, in a world where class actions are available, maintaining 
arbitration agreements would no longer be in the companies' interest, 
resulting in the loss of arbitration as a dispute resolution option for 
those consumers that would have elected to pursue it. If a company were 
to decide to remove

[[Page 33295]]

individual arbitration agreements from their consumer contracts, the 
Bureau believes that these decisions would not be motivated by the 
costs associated with individual arbitrations because those costs are 
minimal. Instead, such a decision would suggest the company only viewed 
the agreement as useful for blocking class actions and no other 
significant purpose.
    Insofar as the Bureau believes that the cost of individual 
arbitration is minimally different from litigation, it remains 
skeptical that this is the reason that will cause companies to remove 
arbitration agreements from their contracts. Specifically, the Bureau 
is unpersuaded that providers incur significant net costs in connection 
with maintaining pre-dispute arbitration agreements today. As the 
commenters indicated, providers generally pay the bulk of the filing 
fees, hearing fees, and arbitrator compensation in individual consumer 
financial arbitrations. In consumer arbitrations conducted by AAA, the 
provider is responsible for a filing fee of $1,700 to $2,200; a hearing 
fee of between $0 and $500; and arbitrator compensation of between $750 
per case and $1,500 per day, depending on the type of arbitration.\685\ 
However, the Bureau believes that, in many cases, these fees may be 
offset by savings from streamlined procedures, such as limited 
discovery in arbitration, fewer in-person hearings, reduced motions 
practice, and less need to hire local counsel, among others.\686\ 
Indeed, one research center commenter that otherwise strongly opposed 
the rule stated its belief that arbitration saves money for both 
consumers and companies. Further, as noted above, while commenters 
asserted that they expend significant resources to ``subsidize'' 
arbitration, no commenter provided a specific accounting or any other 
concrete evidence to support this assertion.
---------------------------------------------------------------------------

    \685\ AAA, ``Consumer Arbitration Rules,'' at 33 (fees effective 
January 1, 2016).
    \686\ See generally Study, supra note 3, section 4 (comparing 
the procedures available in Federal court with the generally more 
streamlined procedures in arbitration). See also AT&T Mobility, LLC 
v. Concepcion, 563 U.S. 333, 345 (noting that ``the informality of 
arbitral proceedings is itself desirable, reducing the cost and 
increasing the speed of dispute resolution.'').
---------------------------------------------------------------------------

    The commenters' arguments that they incur significant net costs in 
connection with individual arbitration are further undermined by the 
fact that most providers face no arbitrations and those that do, face 
very few. The Study identified about 616 AAA consumer arbitrations per 
year for six large consumer financial markets, about 411 of which were 
filed by consumers.\687\ Because individual providers face so few 
arbitrations, even if individual arbitration is marginally more 
expensive than defending the same claim in court (and the Bureau makes 
no determination on that issue), providers are unlikely to realize such 
dramatic cost savings by removing their arbitration agreements that it 
is inevitable that they will do so for cost savings reasons alone.
---------------------------------------------------------------------------

    \687\ Study, supra note 3, section 1 at 11.
---------------------------------------------------------------------------

    The Bureau also remains skeptical that providers would be unwilling 
to litigate individual disputes in both arbitration and court once the 
Bureau's rule goes into effect because providers already litigate 
disputes in both fora today. Providers with arbitration agreements also 
must litigate in State and Federal court to the extent they are sued by 
individuals with whom they do not have contractual relationships or to 
the extent that consumers sue them in Federal or State court and the 
provider does not move to compel arbitration (which the Study showed 
occurred in nearly all individual cases filed in Federal court).\688\ 
While commenters cited several reasons why providers currently maintain 
two tracks of litigation, they did not challenge the Bureau's 
underlying assertion that providers indeed do so. With respect to the 
commenter that criticized the Bureau's sample of 140 individual Federal 
court cases against companies with arbitration agreements as too small 
to draw the conclusion that providers rarely invoke arbitration in 
individual cases, the Bureau disagrees because its analysis of 
individual Federal cases reviewed 1,205 cases and found invocation of 
arbitration was very rare.\689\ More broadly, neither that commenter 
nor others cited specific evidence suggesting that the Study 
undercounted instances in which companies invoked arbitration clauses 
in individual cases.
---------------------------------------------------------------------------

    \688\ Id. section 6 at 57-60.
    \689\ Id. section 6 at 59. The 140 individual cases cited by the 
commenter were those against credit card companies where the Bureau 
could determine that those companies included arbitration agreements 
in their consumer contracts. Id. section 6 at 61. In that set of 
cases, the rate of invocation was 5 percent. In the larger set of 
1,205 Federal individual cases where the Bureau could not determine 
whether the defendant companies included arbitration agreements in 
their consumer contracts, the Bureau also found a very low rate of 
invocation, only 1 percent. Id. section 6 at 59.
---------------------------------------------------------------------------

    With respect to some industry commenters' contention that anti-
severability provisions in arbitration agreements show that providers 
would choose to remove arbitration agreements if this rule were 
finalized, the Bureau understands that providers have adopted anti-
severability provisions for the purpose of preventing cases from 
proceeding as class arbitrations if a court were to find a no-class 
provision to be unenforceable in a particular case.\690\ Because those 
provisions were created for a different purpose, the Bureau does not 
construe the clauses to reveal a preference against maintaining 
individual arbitration once this rule becomes effective.\691\
---------------------------------------------------------------------------

    \690\ See, e.g., Alan S. Kaplinsky & Mark J. Levin, 
``Arbitration Update: Green Tree Financial Corp. v. Bazzle-Dazzle 
for Green Tree, Fizzle for Practitioners,'' 59 Bus. L. 1265, at 1272 
(2004) (stating that companies should consider adopting anti-
severability provisions ``in order to protect themselves from class-
wide arbitration such as occurred in [Green Tree Financial Corp. v. 
Bazzle, 539 U.S. 444 (2003)].'').
    \691\ With respect to the industry commenter's contention that 
post-dispute arbitration will not fill the void created by the 
removal of pre-dispute arbitration agreements, the Bureau does not 
address this comment because the Bureau did not assert in the 
proposal (and does not assert in the final rule) the argument that 
this comment is addressing, nor did any other commenter make it.
---------------------------------------------------------------------------

    For the reasons described above, the Bureau does not believe that 
commenters set forth persuasive reasons for concluding that the costs 
of individual arbitration would cause them to remove their arbitration 
agreements once the class rule becomes effective.
    Whether loss of individual arbitration harms consumers. The Bureau 
further believes that, even if providers do remove their arbitration 
agreements, harm to consumers would be negligible because so few 
consumers pursue arbitration today. The Study showed that very few 
individual consumers filed claims in arbitration about consumer 
financial products; as noted, there were just over 600 arbitration 
filings per year in the six product markets studied and just over 400 
of those were filed by consumers. By contrast, more than 60 million 
consumers per year were eligible for either cash or in-kind relief from 
class actions in the five-year period covered by the Study. Indeed, 
more than 34 million of these consumers obtained cash relief over five 
years studied, or more than six million per year. Thus, the number of 
consumers who sought relief in arbitration pales in comparison to the 
number who actually obtained relief through class actions. The number 
of consumers who sought relief in arbitration also pales in comparison 
to the benefited to consumers from the deterrent effect of class 
actions, which is discussed above in this Part VI.C.1.
    In any event, even if consumers do not have access to arbitration 
for individual claims those still can be filed in court, including 
small claims court.

[[Page 33296]]

As is discussed above, the Bureau is not making a finding as to whether 
individual arbitration is superior to individual litigation for 
consumers; it finds that any such comparison is inconclusive. However, 
even assuming that arbitration is a better forum for resolution of 
individual disputes than the courts--and the Bureau does not have any 
basis to so assume--the few hundred consumers who would be forced to 
file in court rather than in arbitration if providers stopped using 
arbitration agreements would be harmed only to the extent that 
arbitration is worse for them than litigation. These consumers would 
not be left without a forum to prosecute their individual claims. Given 
the extremely low number of consumer-filed AAA and JAMS arbitrations, 
the Bureau believes that the magnitude of consumer benefit, if any, of 
individual arbitration over individual litigation would need to be 
implausibly large for the elimination of some, or even all, arbitration 
agreements to make a noticeable difference to consumers in the 
aggregate.
    Because the Bureau believes that preserving consumers' right to 
participate in a class action is for the protection of consumers even 
if providers will no longer include arbitration agreements in their 
consumer contracts, it is not necessary to address each individual 
argument cited by commenters about why arbitration is a superior forum 
for dispute resolution than litigation. However, the Bureau notes that 
there is reason to be skeptical of those arguments. For example, while 
many industry commenters asserted that arbitration is less expensive 
for consumers to pursue than litigation because filing fees are 
generally less, the Bureau notes that one-third of the arbitration 
agreements analyzed in the Study required consumers to reimburse fees 
and expenses paid by the company if the consumer loses the 
arbitration.\692\ Thus, while arbitrating a successful claim might cost 
less in fees than an individual litigation, arbitrating an unsuccessful 
claim could be quite expensive for a consumer, especially as compared 
to litigation where a consumer will not bear additional expenses if he 
or she loses a claim. Indeed, this risk may even deter consumers who 
are aware of these cost-shifting provisions from pursuing individual 
arbitration because a consumer who loses the case could end up worse 
off than if he or she had never filed a claim in the first place.
---------------------------------------------------------------------------

    \692\ Study, supra note 3, section 2 at 65-66 tbl. 13.
---------------------------------------------------------------------------

    Moreover, some of the commenters that addressed the cost of 
arbitration only compared it to the cost of litigating in Federal 
court. The Bureau believes that many of the consumers who would 
otherwise choose arbitration will pursue their claims in small claims 
courts or courts of general jurisdiction if arbitration is not 
available going forward. Filing fees in these courts are frequently 
quite reasonable and almost always far lower than Federal court.\693\
---------------------------------------------------------------------------

    \693\ E.g., N.Y. Uniform. Just. Ct. Act section 1803(a) (setting 
filing fees for small claims court at between $10 and $20); Cal. 
Civ. Proc. sections 116.230(b)-116.230(d) (same with fees between 
$30 and $75). See also Study, supra note 3, section 4 at 10-12 
(which stated that the fee for filing a case in Federal court is a 
$350 plus a $50 administrative fee, while the fee for a small claims 
filing in Philadelphia Municipal Court ranges from $63 to $112).
---------------------------------------------------------------------------

    As to the comments that noted that consumers often succeeded in 
arbitration claims without an attorney and thus did not need attorneys 
in arbitration, the Bureau notes that consumers likewise do not need 
attorneys to pursue claims in small claims court, which is the most apt 
comparison to arbitration because it offers streamlined procedures 
similar to those available in arbitration.\694\ As to the comments that 
noted that arbitration can be conducted telephonically or online, the 
Bureau notes that this may save consumers some time compared to 
individual litigation which may be required to be filed and heard in-
person. But this time savings alone does not make arbitration superior, 
given the other issues described above.
---------------------------------------------------------------------------

    \694\ E.g., District of Columbia Court, ``Small Claims and 
Conciliation Branch,'' (noting that ``The Small Claims Branch is 
less formal than other branches of the Court. The procedures are 
simple and costs kept low so that most people do not need a lawyer 
to represent them in their small claims case. You must be 18 years 
old to file a case.''). http://www.dccourts.gov/internet/public/aud_civil/smallclaims.jsf (last visited Dec. 20, 2016).
---------------------------------------------------------------------------

    As for the commenters' assertion that most harms that are suffered 
by consumers are individualized and not classable, the Study showed 
that there are millions of consumers who suffer group harms, as 
reflected by the number of consumers who obtained relief in class 
actions (60 million per year), and the Bureau's experience and 
expertise in supervision and enforcement is consistent with this 
conclusion. Most consumer financial products and services involve 
products offered on the same terms to all customers, so it stands to 
reason that when these terms violate the law, they harm all consumers 
bound by them. While there was no dispute that some consumers suffered 
individualized harms, commenters did not put forth any data that both 
contradicted the Bureau's Study and supported commenters' assertion 
that most harms were individualized and not classable.\695\
---------------------------------------------------------------------------

    \695\ While many commenters highlighted that the amount of 
relief awarded in arbitration was much higher than what was awarded 
in individual litigation, they failed to explain the relevance of 
this distinction. As noted above in Part VI.B.2 class actions are 
typically brought to remedy small harms suffered by large groups of 
people that are unlikely to be brought individually. Thus, it is not 
surprising that those claims that consumers do bring individually 
involve much larger claim sums.
---------------------------------------------------------------------------

    Some industry commenters have argued that more consumers would use 
arbitration if only they understood the process more, if arbitration 
agreements were drafted more clearly, or if consumers were properly 
educated to the benefits of arbitration (whether by the Bureau or by 
providers or both), thereby reducing the disparity between the number 
of consumers who use arbitration and the number who obtain relief in 
class actions. The Bureau is not persuaded that the presence of 
education or promotional materials would, for dispute resolution, 
materially alter the dynamics that result in so few individual 
arbitrations for all of the reasons discussed above at Part VI.B.2. The 
alternatives offered by commenters are addressed in detail in the 
Section 1022(b)(2) Analysis below at Part VIII.G.
2. By Enhancing Compliance With the Law and Improving Consumer 
Remuneration and Company Accountability, the Class Rule Is in the 
Public Interest
    In the proposal, the Bureau also preliminarily found that the class 
rule would be in the public interest. This preliminary finding was 
based upon several considerations which individually and collectively 
supported that finding. First, as discussed extensively above, the 
Bureau believed that its preliminary finding that the class proposal 
would protect consumers also contributed to a finding that the class 
proposal would be in the public interest.
    Second, the Bureau preliminarily found that the proposal was in the 
public interest because of the effect it would have on leveling the 
playing field in markets for consumer financial products and services. 
The Bureau preliminarily found 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.

[[Page 33297]]

Specifically, the Bureau stated in the proposal that it believed that 
companies that adopt arbitration agreements with class action 
prohibitions 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 that have 
class action prohibitions would necessarily shift market share to 
companies that eschew such arbitration agreements (and instead focus on 
upfront compliance) because the competitive balance between companies 
would continue to depend on many additional factors. It thus did not 
count the effects of this factor as a major element of the Section 
1022(b)(2) Analysis. However, the Bureau preliminarily found that 
eliminating this type of arbitrage as a potential source of competition 
would be in the public interest.\696\
---------------------------------------------------------------------------

    \696\ 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. The Restoring 
American Financial Stability Act of 2010, S. Rept. 111-176 (2010), 
at 10 (``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.'').
---------------------------------------------------------------------------

    Third, the Bureau preliminarily found that the class proposal was 
in the public interest because it would have the effect of achieving 
greater compliance with the law which creates 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 believed 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 
believed 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 stated in the 
proposal that it believed that promoting the rule of law--in the form 
of accountability under transparent application of the law by providers 
of consumer financial products or services--would be in the public 
interest.
    In the proposal, the Bureau also addressed several reasons 
stakeholders had given during both the SBREFA process and ongoing 
outreach to support their belief that the class rule was not in the 
public interest. These stakeholders had expressed concern that the 
class rule would, among other things, cause providers to remove 
arbitration agreements from their contracts thereby negatively 
impacting the means available to consumers to resolve individual 
disputes formally and informally, impose costs on providers that would 
be passed through to consumers, and reduce incentives for innovation in 
markets for consumer financial products and services. In the proposal, 
the Bureau addressed concerns regarding whether the class rule would 
cause providers to remove arbitration agreements from their contracts 
in the context of its public interest finding; however, for this final 
rule, the Bureau addresses those comments above in Part VI.C.1 in 
connection with its finding that the class rule is for the protection 
of consumers. The Bureau does so because many commenters contended that 
the loss of individual arbitration would harm concerns because 
arbitration is a superior form of dispute resolution than individual 
litigation. The Bureau notes, however, that if providers choose to 
remove arbitration agreements from their contracts, that the loss of 
individual arbitration as a form of dispute resolution arguably impacts 
both providers and the public interest. Accordingly, the Bureau 
incorporates that discussion with respect to its public interest 
findings as well.
    With respect to pass-through costs, the Bureau preliminarily found 
that the class rule would still be in the public interest, even if some 
costs of the rule may be passed through to customers. First, the Bureau 
stated in the proposal its belief 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. 
Thus, the Bureau preliminarily found that the specific marginal costs 
that would be attributable to the class rule are similarly justified, 
even if some of those costs are passed through to consumers. Second, 
the Bureau preliminarily found that 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 in the Section 1022(b)(2) Analysis, the Bureau did not 
believe that the expenses due to the additional class settlements that 
would result from the class rule would result in a noticeable impact on 
access to consumer financial products or services. Similarly, the 
Bureau preliminarily found 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 in the 
Section 1022(b)(2) Analysis that factors in the likelihood of 
litigation, recovery rates, and other considerations.
    With respect to innovation, the Bureau noted that some stakeholders 
suggested that the class rule would discourage innovation in that 
providers would refrain from developing or offering products and 
services that benefit consumers and are lawful due to concerns that the 
products may pose legal risk, for instance because they are novel. The 
Bureau preliminarily found that some innovation can disserve the public 
and that deterring such innovation would actually be in the public 
interest. The Bureau noted examples of such innovation in the mortgage 
market that were a major cause of the financial crisis and led to the 
introduction of a set of high-risk

[[Page 33298]]

products and underwriting practices.\697\ Similarly, the Bureau noted 
that 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.\698\
---------------------------------------------------------------------------

    \697\ 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).
    \698\ 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.
---------------------------------------------------------------------------

    Conversely, the Bureau preliminarily found 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) and 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 believed that to this extent the 
class proposal would affect positive innovations of this type--it would 
tend to facilitate them. The Bureau further preliminarily found that 
even if the class rule deterred some positive innovation on the 
margins, the benefits of the class proposal justified any such impact 
on innovation.\699\ Thus, the Bureau preliminarily found that the class 
rule would still be in the public interest, notwithstanding its impact 
on innovation in the consumer financial marketplace.
---------------------------------------------------------------------------

    \699\ In the proposal, the Bureau also discussed two other 
reasons that stakeholders had given for why the class rule was not 
in the public interest: that class settlements deliver windfalls to 
named plaintiffs and class members and that the class rule would 
negatively affect the means available for consumers to resolve 
individual disputes in arbitration because the class rule will cause 
companies to remove arbitration agreements from their contracts. The 
first issue is addressed above in Part XX, and the second issue is 
addressed above in Part XX.
---------------------------------------------------------------------------

Comments Received
    The Bureau preliminarily found that the class proposal would 
protect consumers for all of the reasons described above in Part 
VI.C.1, level the playing field in the market for consumer financial 
products and services, and that compliance with the law generally 
benefits the public interest. Commenters that opposed this preliminary 
finding on the public interest generally did not dispute the 
affirmative points made by the Bureau in the proposal, but rather cited 
several reasons that the commenters believed led to the conclusion that 
the class proposal was not in the public interest (at least some of 
which the Bureau had preliminarily addressed in the proposal). These 
arguments are discussed in detail below. Many consumer advocate and 
individual commenters agreed with the Bureau's preliminary findings 
that the class proposal is in the public interest because it would 
level the playing field between providers and produce other benefits 
through enhanced compliance with the law. For example, a consumer 
advocate commenter agreed with the Bureau's preliminary finding that 
pre-dispute arbitration agreements harm competition and put providers 
that do follow the law at a competitive disadvantage. An individual 
commenter that was formerly the FINRA Director of Arbitration also 
agreed that the rule was in the public interest and cited the long-term 
success of FINRA's similar rule as applied to broker-dealers and their 
customers.\700\
---------------------------------------------------------------------------

    \700\ FINRA, ``Class Action Claims,'' at Rule 12204(d).
---------------------------------------------------------------------------

    Pass-through costs. Numerous individual commenters expressed a 
general concern about the possibility of higher prices for their 
products as a result of the proposal. These comments urged the Bureau 
not to adopt the proposal but did not elaborate on their pricing 
concerns.\701\ Numerous industry, research center, and State regulator 
commenters also asserted that the potential for pass through of costs 
of the rule to consumers and related effects on consumers should 
invalidate the Bureau's preliminary finding that the class proposal was 
in the public interest. These commenters contended that an increase in 
defense costs for companies will force them to raise prices for 
consumers, decrease their services or slow innovation, none of which 
are in the public interest. For example, a comment from trade 
associations representing depository institutions cited law and 
economics research--some of which relied in part on empirical studies 
outside of the consumer finance context and one of which made claims 
about the lack of consumer benefit achieved by statutory claims--as 
support for its conclusion that the cost of class actions are passed 
through to consumers and that consumers gain little benefit in return. 
To support this point, another industry trade association cited to a 
law review article discussing economic principles. That industry 
commenter also asserted that the Bureau's preliminary findings largely 
rejected the notion that businesses pass on the cost savings of 
arbitration to consumers.
---------------------------------------------------------------------------

    \701\ The Bureau received over 110,000 similar comments, mostly 
from individuals.
---------------------------------------------------------------------------

    In contrast, some commenters were supportive of the Bureau's 
preliminary finding acknowledging that some costs of the rule may be 
passed on to consumers, but concluded that this effect did not negate 
the impacts of the rule that advanced the public interest. For example, 
two commenters questioned whether providers would in fact pass through 
costs to consumers. A public-interest consumer lawyer stated that, in 
its view, assertions of pass-through costs have not been supported by 
credible economic data or studies. Similarly, a research center stated 
that the Bureau's Study supported the conclusion that any cost savings 
from arbitration agreements are not, in fact, passed on to consumers. A 
few consumer advocate commenters and a public-interest consumer lawyer 
commenter stated their belief that there is no evidence that companies 
pass- through savings from pre-dispute arbitration agreements to 
customers and thus conversely no evidence that the class rule would 
increase costs for consumers.
    An individual commenter contended that higher prices passed on to 
consumers may force some consumers out of particular credit markets 
that the consumers could have afforded if the Bureau's proposal were 
not finalized. Several automobile dealers commented that the class rule 
will raise the price of automobile loans significantly, even pricing 
some credit-challenged customers out of automobiles, although the 
commenters provided no specific calculations or details. A group of 
automobile dealers also asserted that the cost of a motor vehicle could 
increase. Several other automobile dealers further asserted that costs 
may be passed on by the indirect automobile lenders to the dealers 
through indemnification obligations. An individual commenter further 
noted that, although Section 10 of the Study found no statistically 
significant increase in the total cost of credit (whether for consumers 
overall or any sub-segment) in analyzing credit card pricing patterns 
after some issuers temporarily dropped their arbitration agreements, 
the Study found an increase in Annual Percentage Rate (APR) for 
consumers with lower credit scores and an increase in annual fees for 
all customers. In the view of this commenter, this data suggests that 
the card issuers' goal was not necessarily to

[[Page 33299]]

pass on new costs to their customers, but instead to adjust certain 
pricing components that tended to make cards appear less attractive for 
riskier customers. That is, this commenter believed card issuers sought 
to ``screen out'' lower-value customers in particular due to the 
increased probability that amounts would be refunded in class actions, 
which rendered such customers particularly less profitable to the card 
issuer.\702\
---------------------------------------------------------------------------

    \702\ Some commenters also characterized the removal of 
arbitration agreements by companies in response to the class rule as 
a form of pass-through costs to consumers. The Bureau analyzes the 
issue of whether providers will remove arbitration agreements 
separately, above in Part VI.C.1.
---------------------------------------------------------------------------

    An industry association representing small-dollar lenders and a 
commenter in this industry asserted that because many States limit not 
only the interest rates but also the fees that small-dollar lenders can 
charge consumers, those lenders may not be able pass through such costs 
onto consumers. These commenters contended that the class rule would 
therefore pose a particular threat to the business model for small-
dollar lenders, who are lenders of last resort for consumers. The 
commenters predicted that the class rule could force consumers to 
resort to unlawful lenders if the rule forced small-dollar lenders out 
of business. Similarly, a Tribe that operates a small-dollar lender 
stated that the class rule would harm the underbanked in particular. 
Several credit union and credit union trade association commenters 
noted that credit unions are member-owned and thus the cost on 
providers to defend additional class actions is passed on to their 
members directly even in the absence of higher fees. A credit union 
trade association also cited a survey of its members as indicating that 
almost half expected to need to raise the cost of credit as a result of 
the class rule.\703\ As discussed above in Part III.D.9, automobile 
dealer commenters and others also criticized the Bureau's Study of 
pricing by credit card issuers that had removed arbitration agreements 
from their consumer contracts as the result of litigation and raised a 
number of criticisms of the methodology and analysis of that Study. A 
Congressional commenter stated his view that the class rule would 
likely cause financial institutions to increase the cash reserves they 
hold to mitigate litigation risk. The commenter stated that this 
increase in cash reserves could, in turn, reduce the amount of cash 
that institutions have available to lend to consumers and small 
businesses, or to invest in technology upgrades and employee retention. 
The commenter referred to this effect as creating ``dead capital.''
---------------------------------------------------------------------------

    \703\ The application of the rule to Tribal entities and credit 
unions is discussed below in the section-by-section analysis of 
1040.3 in Part VII.
---------------------------------------------------------------------------

    Innovation and availability of products. Several industry 
commenters, a research center, and a group of State attorneys general 
contended that the class rule as proposed is not in the public interest 
because it would deter innovation. In general, these comments were very 
high-level and did not offer specific data or examples of how this 
would happen. A group of State attorneys general, who described the 
rule as paternalistic, asserted in their comment that the class 
proposal would limit competition among providers and that competition 
benefits consumers because it generally produces lower prices and 
better products. An association of State regulators asserted that the 
rule will deter innovation, which would harm consumers and the public 
interest. An industry commenter asserted that the class rule is not in 
the public interest because it would deter innovation without producing 
a corresponding benefit to consumers or the public.
    Generally, comments about the impacts on innovation did not touch 
on particular products. The Bureau did receive comments from a credit 
reporting agency and an industry trade association that raised concerns 
regarding the impact the class rule could have on their ability to 
offer credit monitoring and related credit education products they may 
develop due to potential for new exposure to CROA class actions, as 
discussed more fully above in Part VI.C.1 above. The Bureau explains 
below in the section-by-section analysis of Sec.  1040.3(a)(4) in Part 
VII why it finds an exemption for these products not to be in the 
public interest. A research center commenter also stated its belief 
that the rule would have a devastating effect on peer-to-peer lending 
and financial technology products because individuals lending money 
through these platforms may no longer be able to do so if they are 
subject to class action lawsuits and have to bear that risk.
    One industry commenter appeared to agree with the Bureau's 
preliminary finding that some types of innovation can harm consumers 
and the public interest while noting that some types of innovation fall 
in a ``gray area'' between benefitting and harming the public interest. 
A consumer advocate commenter agreed with the Bureau's preliminary 
finding, asserting that valuing unbridled innovation over compliance 
with the law is inappropriate.
    Payments to plaintiff's attorneys. Many Congressional, industry and 
individual commenters and a research center criticized the Bureau's 
preliminary finding that class actions are in the public interest 
because they believe the Bureau failed to adequately consider the costs 
of class actions that settle, both to consumers and to industry. Many 
industry and individual commenters stated their view that class actions 
are not in the public interest because a disproportionate share of 
class action settlement proceeds go to plaintiff's attorneys rather 
than to consumers. According to many of these commenters, the amounts 
that plaintiff's attorneys receive from class actions are relevant to 
determining whether class actions are in the public interest because 
attorney's fees are often deducted from settlement amounts that would 
otherwise go to consumers. For example, one industry commenter noted 
that the Study showed that plaintiff's attorneys received, on average, 
more than $1 million in fees from each class settlement. As a 
percentage of the total settlement amount, the commenter further noted 
that the attorney's fees were 41 percent of each settlement, on 
average, with a median of 46 percent.\704\ Another commenter cited 
examples from an external study of class actions in which class members 
received small payouts while attorneys received large fee awards.\705\
---------------------------------------------------------------------------

    \704\ Study, supra note 3, section 8 at 34 tbl. 11.
    \705\ Mayer Brown, supra note 519.
---------------------------------------------------------------------------

    Relatedly, many industry commenters criticized the Study for 
reporting on the percentage of attorney's fees compared to the total 
settlement amount available to consumers, rather than compared to the 
amount actually paid to consumers. These commenters stated that this 
was misleading because consumers in class settlements often do not file 
claims in those cases that require it and thus consumers rarely receive 
the full settlement amount. Accordingly, these commenters believe that 
the proportion of the settlement payments that are paid to attorneys is 
significantly higher than reflected in the Study. One research center 
commenter suggested that the Bureau should have considered whether the 
total amount of money paid to plaintiff's attorneys from class action 
settlements analyzed in the Study--$424,495,451--is an acceptable cost. 
This commenter also noted that the Study showed that attorney's fees 
were a significantly higher proportion of smaller class action 
settlements than of larger settlements. For example, the commenter 
noted that attorney's fees

[[Page 33300]]

were 56 percent of the total relief in settlements of less than 
$100,000.
    Some industry commenters questioned the accuracy of the Bureau's 
Study with respect to the amounts paid to plaintiff's attorneys from 
class action settlements because those amounts were lower than found in 
other studies. For example, whereas the Bureau's Study found that the 
combined plaintiff's attorney fees over all of the 419 class action 
settlements analyzed were 16 percent of gross relief made available, 
and 21 percent of the combined payments made to consumers, one research 
center commenter cited a study of class action settlements in cases 
filed in one Federal district court concerning both consumer financial 
and other products under a limited number of Federal statutes that 
found plaintiff's attorney fees were rarely less than 75 percent of the 
total amount paid to the class.\706\ Similarly, another industry 
commenter cited a 1999 study of class action settlements that found 
that in three out of 10 cases studied, involving a range of consumer 
markets not limited to consumer finance, plaintiff's attorneys received 
more in fees than consumers received in compensation.\707\ Another 
industry commenter criticized the efficiency and fairness of class 
action settlements that provide significant plaintiff's attorney fees 
but provide only cy pres relief to consumers.\708\
---------------------------------------------------------------------------

    \706\ Note that this figure refers to the amount paid to the 
class (e.g., after claims have been made), not the amount actually 
awarded. Johnston, supra note 520.
    \707\ Hensler et al., supra note 669, at 5, 14. Notably, this 
Study pre-dated the passage of CAFA.
    \708\ In class actions, cy pres relief is relief that is 
distributed to a third party (often a charity) on behalf of 
consumers, instead of to consumers directly in cases where doing so 
is difficult or impossible.
---------------------------------------------------------------------------

    Several consumer advocate commenters explained that in many cases 
attorney's fees are awarded after a settlement is reached and that, 
therefore, they do not impact consumers' recovery; one commenter also 
provided several examples. A consumer advocate commenter explained that 
courts typically calculate fees as a reasonable percentage of the value 
of the settlement and, therefore, attorneys receive fees only when they 
have created value for class members. This commenter noted that Federal 
Rule 23(h) empowers judges to determine reasonable compensation for 
attorneys in class actions. Several commenters noted that various 
factors, including results achieved, risk, and the age and difficulty 
of the case may impact a court's fee award. A letter from a coalition 
of consumer advocates further disputed claims that attorney's fees are 
excessive in class actions. Several comments cited to the Study and 
noted that fees were a reasonable 21 percent of cash compensation paid 
to consumers and only 16 percent of all relief awarded. One of these 
commenters cited to another study that showed that attorney's fees may 
be even lower than found in the Study--only 15 percent of awards in an 
analysis of 688 Federal class actions.\709\ A public-interest consumer 
lawyer commenter further disputed the relative impact of attorney's 
fees by noting its agreement with the Bureau that mechanisms exist to 
curtail frivolous litigation. A comment from a consumer lawyer 
explained that attorney's fees provide motivation to private attorneys 
to act as a market check on bad actors and bad practices. One consumer 
advocate commenter noted that the cost of class action settlements, 
including the cost of settlements themselves and defense costs, is 
likely lower than the cost of litigating each class member's claims in 
a separate case. Another consumer lawyer acknowledged that some 
lawsuits are frivolous but stated that the court system does a good job 
at weeding them out.
---------------------------------------------------------------------------

    \709\ The commenter cited to Brian T. Fitzpatrick, ``An 
Empirical Study of Class Action Settlements and Their Fee Awards,'' 
(Vand. U. Sch. of L. Pub. L. & Legal Theory Working Paper No. 10-10, 
2010), available at https://ssrn.com/abstract=1442108 (this paper 
analyzed all Federal class action settlements in all markets, not 
just consumer finance, in 2006 and 2007).
---------------------------------------------------------------------------

    Several industry commenters criticized the Bureau's preliminary 
finding that class actions are in the public interest because they 
contend that the class action mechanism primarily benefits plaintiff's 
attorneys who abuse the mechanism for their own financial gain. One 
such industry commenter contends that attorneys file putative class 
claims out of self-interest, rather than to benefit consumers. That 
same industry commenter cited instances from the mid-2000s where courts 
or prosecutors found plaintiff's attorneys had made improper payments 
to individuals to recruit potential plaintiffs. The commenter further 
contended that class action settlements are typically structured to 
benefit the plaintiff's attorneys rather than the absent plaintiffs 
because the named plaintiffs have almost no involvement in the case. 
Indeed, the commenter argued that because plaintiff's attorney fees are 
based on the total amount of the settlement, attorneys have an 
incentive to negotiate a high settlement amount, but have no incentive 
to structure the settlement such that absent class members actually 
receive that amount. This commenter further asserted that plaintiff's 
attorneys often enter into ``clear sailing'' agreements with defense 
counsel in class cases, through which defendants agree not to object to 
awards of attorney's fees below a certain amount. In the commenter's 
view, these agreements benefit plaintiff's attorneys at the expense of 
absent class members because the plaintiff's attorneys have no 
incentive to negotiate for better compensation for class members when 
they know that they will receive high fees through the settlement. One 
industry commenter added together the amounts awarded to plaintiff's 
attorneys in the Study and the Bureau's estimate of costs to defend 
class actions from the Section 1022(b)(2) Analysis below in Part VIII 
and contends that the combined totals indicate that attorneys (whether 
plaintiff's attorneys or defense attorneys) benefit more from the rule 
than do consumers.\710\
---------------------------------------------------------------------------

    \710\ The Bureau notes that the commenter incorrectly totaled 
the Bureau's estimates of defense costs from the proposal, as noted 
in the Section 1022(b)(2) Analysis below in Part VIII.
---------------------------------------------------------------------------

    The same industry commenter further contended that courts do not 
adequately supervise class action settlements to ensure that they are 
fair to absent class members, notwithstanding the court's obligation to 
do so under the Federal Rules of Civil Procedure and analogous State 
rules. The commenter, citing a law review article that refers to the 
legislative history leading to the adoption of CAFA, asserted its 
belief that courts face pressure to approve settlements in class action 
cases to clear their dockets and thus do not adequately supervise 
settlements.\711\ A research center commenter cited a study for the 
proposition that judges are more likely to approve class settlements in 
cases where the claims are weak because of the high cost of litigating 
the case on the merits.\712\
---------------------------------------------------------------------------

    \711\ Linda S. Mullenix, ``Ending Class Actions as We Know Them: 
Rethinking the American Class Action,'' 64 Emory L. J. 399, at 430 
(U. Tex. Sch. of L., Pub. L. Res. Paper No. 565, 2014) (citing 
Edward Purcell, ``The Class Action Fairness Act in Perspective: The 
Old and The New in Federal Jurisdictional Reform,'' 156 U. Pa. L. 
Rev. 1823, at 1883 (2008) (citing House Judiciary views in CAFA 
legislative process).
    \712\ Johnston, supra note 520, at 13.
---------------------------------------------------------------------------

    A consumer advocate commenter disputed the relevance of attorney's 
fees, noting that they often come from a common fund, meaning that the 
cost of litigation is paid out of the common fund created by the 
settlement, and that attorneys only receive fees when they have created 
value for class members. Other commenters, including consumer 
advocates, consumer law firms, law

[[Page 33301]]

academics and others emphasized that attorneys should be compensated 
for their time. One of these commenters explained that attorneys 
litigate class actions at considerable risk to themselves. In addition 
to paying all costs upfront, they do not get paid for their time unless 
they prevail or settle the case.
    Strain on the court system. Several industry commenters, a group of 
State attorneys general, and a group of Congressional commenters 
contended the class proposal is not in the public interest because it 
would increase the number of class action lawsuits filed and therefore 
create a strain on the Federal and State court systems, which the 
commenters believe are already overburdened. These commenters asserted 
that an increase in class action lawsuits will cause delays in judicial 
administration and increased costs to Federal and State courts. One 
commenter pointed out that even an unmeritorious class action lawsuit 
creates a burden on the court system because a court must use its 
resources to determine whether it should be dismissed. Several industry 
commenters cited reports and statistics for both State and Federal 
courts supporting this overcrowding and showing that the number of 
cases filed have increased significantly since 2013.\713\ One industry 
commenter referred to the class proposal as an ``unfunded mandate'' 
that the Bureau is imposing on the courts. In contrast, a consumer 
commenter expressed an opinion that strain on the courts should be 
minimal because parties pay their own court costs (as opposed to 
taxpayers funding additional public enforcement).
---------------------------------------------------------------------------

    \713\ U.S. Courts, ``Federal Judicial Caseload Statistics 
2016,'' (June 2016), available at http://www.uscourts.gov/statistics-reports/federal-judicial-caseload-statistics-2016; Exec. 
Comm. of the Bd. of the N.Y. Cty. Lawyers' Ass'n, ``Task Force on 
Judicial Budget Cuts Report,'' (Jan. 18, 2014), available at https://www.nycla.org/siteFiles/Publications/Publications1516_0.pdf.
---------------------------------------------------------------------------

    Harm to relationships between customers and providers. Another 
industry commenter criticized the proposal as not in the public 
interest because the commenter predicted that it would harm the 
relationships between consumers and their financial institutions. The 
commenter stated its belief that the availability of class actions 
discourages consumers and financial institutions from informal 
resolution of disputes.
    Federalism concerns. An individual commenter contended that the 
class rule is not in the public interest because the commenter 
predicted that it would encourage companies to change their behavior 
nationwide in response to class actions brought under a single State's 
consumer protection laws, which could lead to that one State's consumer 
protection laws trumping Federal laws and other States' laws. This 
phenomenon was described by the commenter as ``inverse federalism,'' 
which the commenter viewed as problematic because it contended that 
certain State legislatures are captured by the plaintiff's bar and thus 
pass statutes that are not in the public interest. An industry 
commenter expressed a similar federalism concern. Similarly, an 
industry commenter contended that Gutierrez v. Wells Fargo,\714\ the 
overdraft case discussed above in Part VI.B.3 is an example of such 
inverse federalism in that the case was based on State contract law, 
rather than Federal law, but nonetheless generated nationwide changes 
in behavior with regard to bank overdraft practices.
---------------------------------------------------------------------------

    \714\ Gutierrez v. Wells Fargo Bank, N.A., 730 F. Supp. 2d 1080, 
1082 (N.D. Cal. 2010).
---------------------------------------------------------------------------

    Impairment of freedom of contract. A group of State attorneys 
general commented that the class proposal is not in the public interest 
because they believed that it would impair the freedom of contract by 
preventing consumers and financial institutions from agreeing to 
certain forms of arbitration. In these commenters' view, there is 
significant benefit to empowering consumers and companies to contract 
freely in part because doing so creates prosperity and political 
freedom. Similarly, one industry commenter suggested that the class 
rule would deprive consumers of the ability to choose a consumer 
financial product or service with an arbitration agreement that blocks 
class actions in order that the consumers could avoid being part of a 
class action or potentially having contact with plaintiff's attorneys. 
A research center commenter and a comment from several State attorneys 
general asserted that because arbitration agreements are not universal 
in consumer finance contracts, they do not pose substantial problems 
for consumers because consumers can therefore choose products without 
them.
    In contrast to these comments, a consumer advocate commenter stated 
its belief that arbitration agreements in consumer contracts are 
contracts of adhesion because consumers lack bargaining power with 
their providers and do not negotiate the contracts. An individual 
commenter asserted that this rule does not implicate freedom of 
contract because consumers are powerless to refuse terms imposed upon 
them.
    Public policy concerning arbitration and legal uncertainty. Many 
industry commenters contended that public policy strongly favors 
arbitration, as exemplified by the Supreme Court's decision in AT&T v. 
Concepcion.\715\ In Concepcion, the Court held that the FAA preempted a 
California law that would have prohibited the enforcement of a consumer 
arbitration clause that disallowed participation in class actions. The 
commenters noted that, in doing so, the majority opinion had referenced 
``a liberal Federal policy favoring arbitration.'' \716\ In these 
commenters' view, the class rule would override both the FAA and the 
Supreme Court precedent upholding arbitration agreements and is thus 
against this public policy. These commenters believed that the 
authority provided to the Bureau under Dodd-Frank section 1028 is 
insufficient to supplant this longstanding policy in the absence of 
clear evidence from the Study, which these commenters asserted the 
Study did not provide.
---------------------------------------------------------------------------

    \715\ 563 U.S. 333 (2011).
    \716\ Id. (quoting Moses H. Cone Memorial Hospital v. Mercury 
Constr. Corp., 460 U.S. 1, 24 (1983)).
---------------------------------------------------------------------------

    A group of State regulators contended that the class rule will harm 
the public interest because they predicted that the rule would create 
legal uncertainty in various ways, thereby amplifying the risk of 
litigation exposure for consumer financial service providers. For 
example, the commenter asserted that it is unclear how a class rule 
would affect future cases following Concepcion and other case law 
regarding preemption of State law under the Federal Arbitration Act. 
The commenter asserted that there was uncertainty with respect to 
whether proposed Sec.  1040.4(a)(2) would apply to class actions under 
consumer finance laws only or to all State and Federal class actions. 
The commenter asserted there was also uncertainty concerning whether 
Congress's delegation of authority to the Bureau under section 1028 was 
proper.
    Impact on certain State laws. An industry commenter contended that 
the proposal was not in the public interest (or for the protection of 
consumers) because of the effect it may have on certain State laws. The 
comment specifically referred to a Utah statute which authorizes 
creditors to include class-action waivers in bold type and all capital 
letters in consumer contracts for closed end credit.\717\ The commenter 
believed that this law would be preempted by the Bureau's proposal and 
asserted that such a result would not be in the public interest (or for 
the

[[Page 33302]]

protection of consumers) because it would contradict the determination 
of the Utah legislature.\718\
---------------------------------------------------------------------------

    \717\ Utah Code 70C-3-14.
    \718\ The commenter also stated that the rule would conflict 
with similar provisions in other State laws. The commenter did not 
cite to other laws, however, and the Bureau has not identified other 
laws of this type. Separately, a credit reporting industry commenter 
stated that expanding the coverage to reach security freeze activity 
by consumer reporting agencies would be tantamount to a preemption 
of State laws allowing consumers to place a security freeze on their 
credit reports, since, in its view, it is the prerogative of the 
State legislatures to determine whether to permit class actions 
under these State laws, whose requirements vary.
---------------------------------------------------------------------------

Response to Comments and Findings
    The Bureau has carefully considered the comments received on the 
proposal and further analyzed the issues raised in light of the Study 
and the Bureau's experience and expertise. Based on all of these 
sources, the Bureau reaffirms its preliminary findings that the class 
rule is in the public interest because it will benefit consumers (for 
the reasons discussed above at Part VI.C.1), will level the playing 
field in the market for consumer financial products and services, and 
will promote the rule of law--in the form of accountability under and 
transparent application of the law to providers of consumer financial 
products or services. As noted, no commenters disagreed with the 
Bureau's findings with respect to leveling the playing field in the 
market or promoting the rule of the law. The Bureau addresses 
commenters' other arguments challenging the Bureau's public interest 
finding below.
    Pass-through costs. With respect to commenters that asserted that 
the class rule is not in the public interest because providers will 
pass through increased costs of compliance activities or litigation to 
consumers, the Bureau disagrees that the risk of a pass-through impact 
on consumers negates a finding that the rule is in the public interest. 
The Bureau acknowledged in the proposal and acknowledges again here 
that there is a risk that some or potentially even all such costs will 
be passed through to consumers.\719\ Commenters have been unable to 
identify empirical sources that would permit an estimate of the extent 
of any pass-through effect in consumer financial products and services 
as a whole or for specific markets.\720\ However, despite the lack of 
conclusive quantifiable data on this issue, the Bureau has carefully 
analyzed it at each stage of the rulemaking process as detailed in the 
Study, the proposal, this public interest finding, and the Section 
1022(b)(2) Analysis below in Part VIII. The Bureau finds that the risk 
of pass-through impacts is real, but believes that even if all costs of 
the rule are passed through to consumers that the overall impact would 
be relatively modest on any per-consumer basis. Indeed, the Section 
1022(b)(2) Analysis finds that the pass-through costs would be, on 
average, less than one dollar per account per year. The Bureau further 
finds that these impacts do not negate the conclusion that the class 
rule is in the public interest.
---------------------------------------------------------------------------

    \719\ As summarized above and in Section 10 of the Study, the 
Bureau performed what it believes is the most rigorous analysis of 
potential pass-through effects in the use of arbitration agreements 
in the consumer financial products and services context by analyzing 
pricing patterns in the credit card market after certain issuers 
dropped their arbitration agreements as part of a settlement in an 
antitrust case. The Bureau found no statistically significant 
evidence of changes in overall pricing among the issuers who dropped 
their agreements relative to issuers who did not change their 
approach to arbitration. However, the Bureau acknowledged in the 
Study and in the proposal that the results do not allow for 
conclusive determinations with respect to the likelihood of pass-
through costs given that the settlement only required issuers to 
drop their arbitration agreements for a limited time period. The 
Bureau's proposal did not make a preliminary finding that the Study 
indicated that pass-through effects would not occur if the proposal 
were adopted. In addition, the Bureau disagrees with commenters that 
assumed that, if the Bureau did not generate an estimate of a 
particular type of cost, this meant that the Bureau assumed or found 
that such a cost would not be passed through in the first instance. 
For example, the Bureau acknowledges that State class action costs 
and costs of individual settlements may be as likely to be passed 
through to consumers as other costs that the Bureau was able to 
generate numerical estimates for.
    \720\ As noted above, commenters cited some limited empirical 
evidence from markets for other types of products and services but 
largely relied on more general economic principles and reasoning.
---------------------------------------------------------------------------

    Furthermore, the Bureau disagrees that the general risk of pass-
through costs necessitates a conclusion that the class rule is not in 
the public interest. Rather, the Bureau believes, as it stated in the 
proposal, that complying with laws has costs, because exposure to class 
litigation deters non-compliance (or incentivizes compliance), these 
additional costs are justified. To incentivize such compliance there 
must be meaningful consequences for non-compliance. Given the Bureau's 
findings, as discussed above, that few consumers will invoke individual 
remedies (either through litigation or arbitration) and that public 
enforcement is not sufficient to enforce the relevant laws in light of 
the size of these markets and the limitations on public resources, 
exposure to class action litigation will serve as an effective 
compliance incentive. Accordingly, litigation and remediation costs 
generally are a necessary component of the success of the broader 
private enforcement scheme.
    Thus, in the Bureau's view, the specific marginal costs that are 
attributable to the class rule are justified and in the public interest 
because of the resulting benefits in the form of protection of 
consumers (chiefly deterrence, and where non-compliance has not been 
deterred, remediation of consumer harm along with a more level playing 
field). The Bureau finds that the class rule would bring about better 
compliance and make more remedies for non-compliance available to 
consumers. Both of these may result in increased costs, but the Bureau 
finds that the costs are necessary to make covered products generally 
safer and fairer for consumers.\721\
---------------------------------------------------------------------------

    \721\ 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 costs in the compliance function 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. Compliance investments are generally risk-based, and if 
those activities identify areas where there are consistently no 
errors detected, then firms may shift their efforts to other areas 
of higher risk. 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.
---------------------------------------------------------------------------

    It is possible that, in certain markets, a particular provider may 
increase its pricing so as to make its products unaffordable for 
persons of more limited means, or otherwise change its pricing 
structure to attract fewer of these customers. Commenters raised 
concerns along these lines related to certain credit and deposit 
products, for example. However, the Bureau does not believe that 
overall pricing across providers in these markets would be so affected 
as to limit access to products or services. In several of the markets 
covered by the Bureau's Study, the Bureau found that many providers do 
not use arbitration agreements today. As demonstrated by the 
information gathered to estimate prevalence in those markets for the 
Bureau's impacts analysis in Part VIII below, the Bureau believes the 
same is likely to be true of many other markets covered by the rule but 
outside the scope of the Study. In all of these markets, the pricing of 
providers who do not use arbitration agreements would be unaffected by 
the rule.
    Moreover, even in markets where arbitration agreements are 
ubiquitous, the Bureau does not believe that to the extent providers 
pass through costs, they will do so in a way that materially

[[Page 33303]]

shrinks their customer base. For example, in the automobile market, the 
Section 1022(b)(2) Analysis below in Part VIII estimates that the 
overall annual increase in costs to the average firm is $17,049, and 
the Bureau does not expect any resulting price increase for automobile 
loans to be significant enough to price a substantial number of 
consumers out of that market. As for the commenter that suggested that 
the pass-through costs from the class rule will cause providers to stop 
offering products to lower-value customers, the Bureau does not believe 
that the costs as estimated in the Section 1022(b)(2) Analysis are 
large enough to cause this to occur at an industry-wide level (though 
it could, however, occur for certain individual providers).
    To the extent that commenters such as small-dollar lenders asserted 
that their industry's profit margins are so thin that their products 
cannot be offered in a legally compliant manner (including by complying 
with State usury and other pricing limitations), the Bureau believes 
that such arguments essentially assert that those products do not 
currently comply with the law and thus the providers would likely be 
sued in class actions if their arbitration agreements did not block 
class actions. To the extent that is the case, the Bureau believes that 
protecting consumers against products and services that do not comply 
with the law both benefits consumers for the reasons explained above in 
Part VI.C.1 and advances the public interest.
    To the extent that commenters asserted that the possibility of a 
differential impact on other particular types of providers or their 
customers negates a finding that the class rule is in the public 
interest, the Bureau disagrees.\722\ With regard to the particular 
economic structure of credit unions, as further discussed in the 
section-by-section analysis of Sec.  1040.3 in Part VII and in the 
Section 1022(b)(2) Analysis below in Part VIII, the Bureau recognizes 
that to the extent credit unions absorb increased costs as a result of 
the class rule, at least some of those costs may be passed on to credit 
union members in the form of lower dividends. It is also true, of 
course, that the credit union members will benefit from those costs to 
the extent they reflect increased levels of compliance or redress for 
wrongful or legally risky conduct. In any event, the Study indicated, 
and credit union industry commenters acknowledged, that credit unions 
do not rely heavily on arbitration agreements. Furthermore, even for 
the small percentage of credit unions that do employ arbitration 
agreements, the fact that credit unions are member-owned--and the fact 
that most credit unions are small institutions--suggests that credit 
unions are unlikely to face a significant increase in the frequency of 
class actions and thus unlikely to incur a significant cost 
increase.\723\. Similarly, to the extent that creditors hold extra cash 
reserves or are unable to pass through costs and therefore reduce 
lending, the Bureau believes that this effect would be relatively 
modest and does not alter the conclusion that the class rule is in the 
public interest.
---------------------------------------------------------------------------

    \722\ To the extent that commenters argued instead that the rule 
should exempt particular types of providers, those arguments are 
discussed in greater detail below in the Section 1022(b)(2) 
Analysis.
    \723\ The particular impact of the class rule on small entities 
is addressed in the Final Regulatory Flexibility Act Analysis below 
at Part IX. As discussed in detail there, an exemption to the class 
rule for small entities would not reduce burden by any significant 
degree for most of the over 50,000 small entities covered by the 
rule, while at the same time would potentially create significant 
unintended market distortions. Further, the Bureau notes that 
insurance may be another way for small businesses to manage concerns 
about the unpredictability of litigation costs. Insurance is itself 
a cost, but it reduces exposure to a larger cost that is incurred 
episodically by some insureds by spreading those costs across a 
large base of insureds. Some small businesses that participated in 
the SBREFA process indicated that they maintained potentially useful 
coverage, although they indicated some uncertainty due to such 
factors as ambiguous language in insurance contracts and caps on 
coverage against certain types of claims. SBREFA Report, supra note 
419, at 23-24.
---------------------------------------------------------------------------

    The Bureau also has considered the comments that expressed concern 
that rather than raising prices, companies could instead be forced out 
of business as a result of the class proposal. To the extent these 
commenters were concerned that a class action settlement could put a 
provider out of business, the Bureau believes that risk is low.\724\ If 
paying full relief to consumers in a class settlement would threaten a 
provider's financial condition, that institution may have leverage to 
negotiate a settlement that provides less than full relief. In 
particular, Federal courts have broad discretion to consider the 
financial condition of the defendant as a factor when determining 
whether a proposed class action settlement is fair, reasonable, and 
adequate, as is required by Rule 23 of the Federal Rules of Civil 
Procedure.\725\ Courts have exercised that discretion to approve class 
settlements that provide considerably less relief to consumers than may 
have been available if the case proceeded to trial and consumers 
prevailed.\726\ And on the rare occasion that a class action does 
proceed to trial, the trial court must take into account due process 
considerations when determining or reviewing damage awards, which 
naturally leads to a review of the defendant's financial 
condition.\727\
---------------------------------------------------------------------------

    \724\ To the extent these commenters were concerned that 
compliance with the law would put providers out of business, as 
discussed below, the rule would still be in the public interest even 
if certain providers could not offer their products if they had to 
comply with the law.
    \725\ See, e.g., County of Suffolk v. Long Island Lighting Co., 
907 F.2d 1295, 1323-24 (2d Cir. 1990) (affirming that ``ability of 
the defendants to withstand a greater judgment,'' announced in City 
of Detroit v. Grinnell Corp., 495 F.2d 448, 463 (2d Cir. 1974), 
remains a factor to be considered by the court when determining 
whether a class settlement is fair, reasonable, and adequate); New 
England Carpenters Health Ben. Fund v. First DataBank, Inc., 602 
F.Supp.2d 277, 280 (D.Mass. 2009) (noting that many courts in the 
1st Federal appellate circuit have relied upon the test announced in 
Grinnell); Girsh v. Jepson, 521 F.2d 153, 157 (3d Cir. 1975) 
(adopting ``ability of defendants to withstand a greater judgment'' 
as a factor to be considered), cited in Osher v. SCA Realty I, Inc., 
945 F.Supp. 298, 304 (D.D.C. 1996) (trial court in D.C. Federal 
circuit considering ability to withstand greater judgment as a 
factor); In re: Jiffy Lube Securities Litigation, 927 F.2d 155, 159 
(affirming trial court approval of settlement taking into account 
the solvency of the defendants); Swift v. Direct Buy, Inc., 2013 WL 
5770633 at *7 (N.D. In. 2013) (trial court in 7th Federal appellate 
circuit considering financial condition of defendant as a factor, 
based on Grinnell); In re: Wireless Telephone Federal Cost Recovery 
Fees Litig., 396 F.3d 922, 932 (8th Cir. 2005) (``defendant's 
financial condition'' is a factor that a court must consider); 
Torrisi v. Tucson Elec. Power Co., 8 F.3d 1370, 1376 (9th Cir. 1993) 
(affirming consideration of defendant's financial condition as a 
predominant factor).
    \726\ See, e.g., In re: Capital One TCPA Litig., 80 F.Supp.3d 
781, 790 (N.D. Ill. 2015) (court approving proposed $75.5 million 
settlement, despite estimating that class recovery in a successful 
litigation would range between $950 billion and $2.85 trillion, 
because courts ``need not--and indeed should not'' reject a 
settlement solely because it does not provide full relief, 
``especially . . . when complete victory would most surely bankrupt 
the prospective judgment debtor'').
    \727\ Courts must take into account the reasonableness of the 
damages awarded at trial including whether they are so severe and 
oppressive as to be wholly disproportionate and offending due 
process under the U.S. Constitution. These considerations naturally 
lead to analysis of a defendant's financial condition as well. See, 
e.g., United States, et al v. Dish Network LLC, Case No. 09cv3073 
(C.D.Ill.) (Slip Op. of June 5, 2017 at 373-75, 427-28) (citing due 
process standards announced in St. Louis I.M. & S. Ry. Co. v. 
Williams, 251 U.S. 63, 66-67 (1919), as a significant factor in 
support of court's decision to award penalties and statutory damages 
totaling $280 million for violations of telemarketing laws including 
the TCPA, based on detailed consideration of defendant's financial 
condition, where plaintiffs had requested $2.1 billion and 
defendants faced maximum exposure of over $727 billion).
---------------------------------------------------------------------------

    Innovation and availability of products. In response to commenters 
that contended that the class rule would deter innovation, the Bureau 
notes that the implicit premise of this argument is that innovators 
will be prepared to engage in more legally risky behavior in a regime 
in which they are exposed only to the risk of individual arbitration or 
litigation than in a regime in which they

[[Page 33304]]

face potential class action exposure. That is at the heart of why the 
Bureau believes that, on balance, the rule is in the public interest. 
As the Bureau noted in its proposal, not all forms of innovation 
necessarily benefit consumers. No commenters disagreed with the 
Bureau's preliminary findings noting that there are some types of 
innovation that disserve consumers and the public and the Bureau 
reaffirms its preliminary findings in this regard. To the extent 
innovations of these types would be discouraged, the Bureau believes 
such a result would be in the public interest.\728\
---------------------------------------------------------------------------

    \728\ To the extent that the rule encourages compliance with 
relevant laws by deterring innovation that involves legally-risky 
behavior, the Bureau nevertheless believes that the rule would be 
for the protection of consumers as well as discussed above in Part 
VI.C.1.
---------------------------------------------------------------------------

    Conversely, the Bureau notes, as it stated in the proposal, that 
some innovation is designed to mitigate risk and that to the extent 
that the class rule would affect positive innovations of this type, it 
would tend to facilitate them. No commenters disagreed with the 
Bureau's preliminary findings in this regard and the Bureau reaffirms 
them here.
    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, carries legal risk. The Bureau 
believes that these innovators who create such products, in general, 
consider a variety of concerns when bringing their ideas to market and 
doubts that the innovators would be deterred from launching a new 
product they would otherwise choose to launch because of the risk of 
class action exposure. But, even if at the margins, the effect of the 
class rule would be to deter certain innovations from occurring or to 
reduce the availability of certain products, the Bureau believes that, 
on balance, that would be a reasonable cost to achieve the benefits of 
the rule for the public and consumers. The Bureau believes that, in 
general, in a well-functioning regulatory regime, entities must balance 
their desire to profit, such as through innovation, with the need to 
comply with laws designed to protect consumers.\729\ With respect to 
the commenter that particularly focused on the effect of the rule on 
peer-to-peer lending, without taking a position on the liability of 
such peer lenders, the Bureau notes that the pre-dispute arbitration 
agreements of online lending platforms, generally reference and protect 
only the platform, not the individual lenders.
---------------------------------------------------------------------------

    \729\ See Dan Quan, ``Project Catalyst: We're open to innovative 
approaches to benefit consumers,'' Bureau of Consumer Fin. Prot. 
Blog (Oct. 10, 2014), https://www.consumerfinance.gov/about-us/blog/were-open-to-innovative-approaches-to-benefit-consumers/ 
(``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.'').
---------------------------------------------------------------------------

    In response to commenters that asserted that the proposal would 
chill innovation without providing any corresponding benefit, the 
Bureau finds that the class rule would produce significant benefits, as 
noted throughout the Section 1022(b)(2) Analysis, such as relief 
provided to consumers through class action settlements and deterring 
companies from future violations of the law. The Bureau thus finds that 
the impact of the class proposal on innovation and the availability of 
products 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 as well as to encourage innovation 
leading to more efficient compliance. For all of these reasons, the 
Bureau reaffirms its preliminary findings, as elaborated here, that the 
class rule is in the public interest both because of and 
notwithstanding its impact on innovation or the availability of 
products in the marketplace for consumer financial products and 
services.
    Payments to plaintiff's attorneys. Many commenters, including those 
from Congress, industry nonprofits, and individuals also criticized the 
class rule as not being in the public interest because a substantial 
portion of class action settlement funds goes to plaintiff's attorneys 
instead of to consumers. As commenters noted and the Study reflected, 
the amounts paid to plaintiff's attorneys from class action settlements 
are substantial--a total of $424,495,451--for the 419 class settlements 
analyzed in a five-year period, for an average of more than $1 million 
per settlement.\730\ This amounts to 16 percent of gross relief awarded 
to consumers, and 21 percent of the amounts actually paid to consumers, 
and are the averages more likely applicable to consumers. And while one 
commenter emphasized per-settlement attorney's fees percentages from 
the Study--with a mean of 41 percent and median of 46 percent--such 
data is less relevant to the average consumer. This per-settlement data 
reflects the high number of settlements involving claims under statutes 
that cap the amount of recovery in a class action (such as those 
involving debt collection under the FDCPA), which necessarily result in 
lower gross relief to the class and proportionally higher attorney's 
fee awards, as discussed in detail below in this Part VI.C.2. Indeed, 
the Study broke out the attorney's fee percentages by class size, which 
showed that as the size of the class settlement decreases, the 
proportion of the attorney's fees relative to the total relief awarded 
consumers increases.\731\
---------------------------------------------------------------------------

    \730\ Study, supra note 3, section 8 at 33 tbl. 10.
    \731\ Study, supra note 3, section 8 at 34 tbl. 11. Indeed, the 
Study showed that in many of the smaller cases, attorney's fee 
awards were often higher than the amounts awarded to consumers.
---------------------------------------------------------------------------

    The Bureau does not believe that these data suggest that 
plaintiff's attorneys are being unjustly enriched, let alone call into 
question the overall efficacy or value of class actions to the public 
interest. Commenters did not dispute that it is time-intensive and 
expensive to litigate large-scale consumer class actions and that most 
plaintiff's attorneys would not take on such cases if they did not 
expect to be paid for successful cases. In the typical individual case, 
an attorney will request a 33 percent or higher contingency from any 
funds that their client might receive.\732\ Indeed, and as is discussed 
above, the class action procedure was designed to make it economical to 
pursue small claims en masse. Further, no commenters suggested that 
class actions could be prosecuted on a pro se basis especially given 
Federal Rule 23's requirement that representation be adequate in order 
for a class to be certified, and the Bureau found no support for this 
notion in the Study either. Thus, for class actions to make it 
economical to pursue small claims en masse, they would need to provide 
fee awards to attorneys, in part, to incentivize attorneys to invest 
time and resources to litigate class actions on behalf of individual 
consumers who rationally do not litigate small claims.\733\ Under this 
system, there is no

[[Page 33305]]

guarantee that plaintiff's attorneys who invest their time and money in 
such cases will receive any fee at all. In addition, as described in 
the summary of the comments above, many plaintiff's attorneys commented 
in support of the class rule and explained the role that fee awards 
play in allowing them to pursue class action relief on behalf of 
consumers that they would not rationally pursue (and thus typically do 
not pursue) on an individual basis.
---------------------------------------------------------------------------

    \732\ E.g., Nora Freeman Engstrom, ``Attorney Advertising and 
the Contingency Fee Cost Paradox,'' 65 Stan. L. Rev. 633, at 692 
(2013) (``For years, commentators have observed that contingency 
fees are remarkably sticky, hovering around 33 percent.'').
    \733\ See Theodore Eisenberg, et al., ``Attorneys' Fees in Class 
Actions: 2009-2013,'' (N.Y.U. Sch. of L. Law & Economics Res. Paper 
Series Working Paper No. 17-02, 2016) available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2904194 (``If fees are 
set too low, counsel will not receive fair compensation for their 
services to the class. Worse yet, if fees are too low, then 
qualified counsel will not bring these cases in the first place. 
Injured parties will receive no redress and potential wrongdoers 
will no longer be deterred out of fear of potential class action 
liability.'').
---------------------------------------------------------------------------

    With respect to commenters that criticized the fact that 
plaintiff's attorney fees are deducted from the settlement amounts 
intended for consumers, the Bureau notes that legal representation has 
a cost and this cost must be paid so that consumers can achieve class 
relief. To the extent the fees of plaintiff's attorneys are paid by the 
beneficiaries of their services (and diminish the beneficiaries' net 
recovery) that is not, in the Bureau's view, an inappropriate 
allocation of costs. Indeed, legal representation, like any other 
service, has a cost and is how most plaintiff's attorneys--class or 
otherwise--are compensated. The Bureau also notes that deduction of 
plaintiff's attorney fees from consumer recoveries does not occur in 
all class actions. Plaintiff's attorney fees in class action 
settlements can be based on recovery from the ``common fund'' (in which 
case the fees are subtracted from the amount agreed to be paid to 
consumers) or they can be awarded separate from the fund in cases where 
the underlying statute under which claims were asserted provides for 
attorney's fees.\734\ Some commenters suggested that even when 
attorney's fees are awarded separate from the fund, the company still 
has an incentive to reduce the amount of the fund in order to make room 
for the attorney's fees. Assuming this is true, as noted above, this is 
the cost of litigating class actions and it is reasonable for that cost 
to be paid (even by consumers) when benefits are achieved in a class 
settlement.
---------------------------------------------------------------------------

    \734\ See, e.g., Federal Judicial Center, ``Manual for Complex 
Litigation,'' at Sec.  21.7 (4th ed. Thomson West 2016).
---------------------------------------------------------------------------

    Similarly, some commenters criticized plaintiff's attorney fee 
awards because they are based on the amount available to be paid to the 
class, rather than the amounts that end up being paid out after 
consumers make claims. As discussed above in Part VI.B.3, however, a 
significant number of consumer finance class actions settlements 
provide for automatic payments. With respect to all class settlements, 
including claims-made settlements, courts oversee the fairness and 
adequacy of fee awards in accordance with case law. Pursuant to these 
precedents, courts are required to find that fee awards in settled 
class action cases are fair.\735\ As part of that review, the courts 
also examine consumer notice procedures and can consider potential 
claims rates. Further, in cases in which attorney's fee awards are 
statutory, courts typically award the fees based on a reasonable number 
of hours expended working on the case, multiplied by a reasonable rate 
and by a factor to compensate the plaintiff's attorneys for the risk 
they took (the ``lodestar'' method).\736\ Even in common fund cases, 
courts typically require plaintiff's attorneys to justify their request 
for fees by submitting records of the number of hours that they worked 
on the case, so that the court can ensure that the fee award is 
reasonable.\737\ Thus, it is not surprising that the Study found that 
the overall attorney's fee percentages did not increase significantly 
when calculated as a percentage of amounts actually paid (21 percent) 
as compared to when calculated as a percentage of the gross relief 
awarded to consumers (16 percent).
---------------------------------------------------------------------------

    \735\ E.g., Newberg et al., supra note 65, at Sec.  15. See 
also, Order & Final Judgment at 1, Trombley v. National City Bank, 
No.10-00232, (D.D.C. Dec. 1, 2011), ECF No. 56 (``Upon careful 
consideration of the Revised Settlement Agreement, its subsequent 
modifications, plaintiffs' motion for final approval of the class 
action settlement, plaintiffs' motion for an award of attorneys' 
fees, reimbursement of expenses, and incentive awards to the 
representative plaintiffs . . . and the entire record herein, . . . 
the Court grants final approval of the settlement as set forth in 
the parties' Revised Settlement Agreement . . . .'') (cited at 81 FR 
32830, 32932 (May 24, 2016)); Memorandum Order & Opinion at 2, In 
Re: Trans Union Corp. Privacy Litig., No. 1350, (N.D. Ill. Apr. 6, 
2009) ECF No. 591-2 (reducing requested attorney's fees to 10 
percent of recovery where ``[m]ovants . . . submitted extensive, yet 
flawed, documentation and declarations to support their requests for 
these fees'') (cited at 81 FR 32830, 32849 (May 24, 2016)).
    \736\ Newberg et al., supra note 65, at Sec.  15:38. See e.g., 
Order Granting Plaintiff's Motion for Final Settlement Approval & 
Granting Plaintiff's Application for Attorney's Fees, Expenses, & 
Incentive Awards, Villaflor v. Equifax Info. Svcs., L.L.C., No. 09-
00329 (N.D. Cal. May 3, 2011), ECF No. 177 (approving attorney's fee 
application based on hours worked in case based on FCRA claim and 
request for statutory attorneys fees) (cited at 81 FR 32830, 32932 
(May 24, 2016)); Order Granting: (1) Final Approval to Class Action 
Settlement; (2) Award of Attorney's Fees; and (3) Judgment of 
Dismissal at 7, Lemieux v. Global Credit & Collection Corp., No. 08-
01012, (S.D. Cal. Sept. 20, 2011), ECF No. 46 (analyzing attorney's 
fee request in a settlement involving TCPA claims and a request for 
statutory attorney's fees, under the lodestar method and determining 
``[u]nder the facts presented in this case, the Court finds the 
amount of hours expended, Counsel's billing rates, and the positive 
multiplier of 1.46 to be reasonable,'' justifying payment of 
requested fees) (cited at 81 FR 32830, 32931 (May 24, 2016)).
    \737\ Federal Judicial Center, ``Manual for Complex 
Litigation,'' at Sec.  21.724 (4th ed. Thomson West 2016). See, 
e.g., Order Awarding Attorneys' Fees And Reimbursement of Expenses 
at 3-4, Faloney v. Wachovia Bank, N.A., No. 07-01455 (E.D. Pa. Jan. 
22, 2009), ECF No. 118 (granting an attorney's fees request in 
common fund case, noting that 6,372 attorney hours had been billed, 
and that the fee requested was based on a reasonable multiple of the 
resulting loadstar of $2,266,691) (cited at 81 FR 32830, 32931 (May 
24, 2016)); Final Approval Order & Judgment at 3-4, In re: Chase 
Bank USA, N.A. ``Check Loan'' Contract Litig., No. 09-02032, (N.D. 
Cal. Nov. 19, 2012), ECF No. 386 (``The Court further finds the 
requested service awards are fair and reasonable, given the time and 
effort expended by the recipients on behalf of the Class. 
Accordingly, Class Counsel is hereby awarded attorneys' fees . . . 
to be paid from the common Settlement Fund . . . .'') (cited at 81 
FR 32830, 32931 (May 24, 2016)).
---------------------------------------------------------------------------

    As to the commenters that noted that plaintiff's attorney fees are 
proportionately higher in smaller settlements than in larger 
settlements, the Bureau believes that this likely reflects that there 
are certain minimum ``fixed costs'' to litigating a class action, which 
courts recognize as reasonable to recover, and also that a number of 
Federal consumer laws cap the amount available for recovery in a class 
action. When these costs occur in a case that ultimately provides 
smaller amounts of relief to consumers, the percentage of attorney's 
fees will necessarily be higher.\738\ In terms of hours, as noted 
above, courts often take into account the number of hours an attorney 
worked on a class action case in awarding attorney's fees. The Bureau 
does not agree that the potential for consumer finance cases in which 
plaintiff's attorney fees are high relative to the settlement amount or 
even more than the settlement amount compels a finding that those class 
actions do not protect consumers or are not in the public interest. The 
Bureau finds that such an outcome is uncommon, and notes that courts 
scrutinize these settlements like any other, rejecting them when they 
are not fair and reasonable or approving them when they are.\739\ These 
cases still provide

[[Page 33306]]

benefits to consumers, whether in the form of injunctive relief or more 
limited compensation, and deter companies from violating the law, as 
discussed above in Part VI.C.1. Indeed, the prospect that a company 
might be forced to pay attorney's fees in a class action settlement 
deters violations of the law just as much as the prospect that a 
company might be forced to provide relief to consumers. Given the 
limited resources of public enforcers, it is less likely that public 
enforcement would devote resources to cases involving harms totaling 
relatively small amounts; thereby making private enforcement more 
important for such cases.
---------------------------------------------------------------------------

    \738\ See, e.g., Theodore Eisenberg & Geoffrey P. Miller, 
``Attorney Fees and Expenses in Class Action Settlements: 1993-
2008,'' 7 J. Empirical Legal Stud. 248, at 279 (2010) (noting that 
class action awards exhibit a strong ``scale effect'' in that 
attorneys receive a smaller proportion of the recovery as the size 
of the recovery increases, and stating that this effect occurs 
because increased aggregation of claims leads to greater 
efficiency).
    \739\ E.g., Allen v. Bedolla, 787 F.3d 1218, 1224, 24; 165 Lab. 
Cas. P 36348, 91 Fed. R. Serv. 3d 1108, 24 Wage & Hour Cas. 2d (BNA) 
1437 (9th Cir. 2015) (emphasizing that warning signs such as the 
fact that the amount of attorney's fee was three times higher than 
the amount paid to the class ``does not mean the settlement cannot 
still be fair, reasonable, or adequate''); Harris v. Vector 
Marketing Corp., 2011 WL 4831157, *4 (N.D. Cal. 2011) (``This is not 
to suggest that fees which exceed actual class recovery are 
necessarily disproportionate or reflect a conflict of interest.''); 
Koby v. ARS, 846 F.3d 1071 (9th Cir. 2017) (rejecting class 
settlement approved by magistrate judge because there was no 
evidence that class members received any benefit from the settlement 
and class members relinquished their rights to seek damages on the 
same issue in any other class action).
---------------------------------------------------------------------------

    Further, certain statutes cap the total amount of relief that can 
be awarded in a class action under that statute. For consumer finance 
laws, these include the Expedited Funds Availability Act (EFAA), EFTA, 
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.\740\ Given the fixed costs of litigating, it 
is therefore more likely that cases asserting claims under such capped 
statutes would result in attorney's fee awards that are higher in 
relation to the amount of monetary relief awarded to the class than 
awards in cases asserting claims under uncapped statutes or under 
common law theories. The Bureau does not believe that the existence of 
these damages caps or the resulting relationship between attorney's 
fees and consumer relief suggests that class actions for violations of 
these statutes are not in the public interest. The Bureau finds no 
evidence to suggest that class actions with lower recovery amounts (and 
potentially relatively higher attorney's fees) do not benefit consumers 
in part because, as discussed above in Part VI.C.1, the Bureau believes 
such class actions, like all class actions, have a deterrent 
effect.\741\
---------------------------------------------------------------------------

    \740\ These caps can be summarized as follows:
     EFAA: Capped amount of lesser of $500,000 or 1 percent of net 
worth of creditor; capped amount is in addition to any actual 
damages; punitive damages are not expressly authorized. 12 U.S.C. 
4010(a)(2)(B)(ii);
     EFTA: Capped amount of lesser of $500,000 or 1 percent of net 
worth of the defendant; capped amount applies to statutory damages 
for ``the same failure to comply''; punitive damages are not 
expressly authorized. 15 U.S.C. 1693m(a)(2)(B). As discussed in 
Appendix L of the Study, we did not cover cases related solely to 
violation of EFTA ATM disclosure requirements. EFTA also authorizes 
trebling of actual damages for certain claims under 15 U.S.C. 
1693f(e);
     FDCPA: Capped amount of lesser of $500,000 or 1 percent of net 
worth of defendant; capped amount is in addition to any actual 
damages; punitive damages are not expressly authorized. 15 U.S.C. 
1692k(a)(2)(B);
     TILA including CLA, FCBA: Capped amount of lesser of $1 million 
or 1 percent net worth of creditor; capped amount is in addition to 
any actual damages; punitive damages are not expressly authorized; 
prior to Dodd-Frank July 2010 DFA 1416(a)(2), was $500,000. 15 
U.S.C. 1640(a)(2)(B); and
     ECOA: Does not authorize statutory damages, but rather actual 
damages, as well as punitive damages up to $10,000, with combined 
amounts in a class case subject to limit of lesser of $500,000 or 1 
percent of net worth of creditor. 15 U.S.C. 1691e(b).
    \741\ Indeed, some of the law firm alerts cited by the Bureau as 
examples of the deterrent effect of class action settlements involve 
class actions asserting claims under capped statutes.
---------------------------------------------------------------------------

    With respect to commenters that questioned the accuracy of the 
Study's data as it pertained to attorney's fees in class action 
settlements, the Bureau points out that the two competing studies cited 
by commenters covered many cases that would not be covered by this rule 
and were not covered in the Study. For example, the RAND study cited by 
one commenter was a 1999 case study of 10 cases that pre-dated CAFA, 
and only four of the cases studied were consumer finance cases.\742\ 
For comparison, the Bureau's Study analyzed 419 class action 
settlements, all of them concerning consumer financial products or 
services.\743\ Moreover, while one commenter cited the RAND study for 
the proposition that attorney's fees were higher than relief provided 
to consumers in three out of 10 cases, two of those cases were small 
settlements (each just under $300,000), which as discussed above are 
more likely to lead to situations in which attorney's fees are higher 
than consumer payout. Further, that study's authors ultimately did not 
agree with the conclusion that class actions produce large payouts for 
the attorneys at the expense of plaintiffs and consumers. Instead, the 
authors opined that ``[t]he wide range of outcomes that we found in the 
lawsuits contradicts the view that damage class actions invariably 
produce little for class members, and that class action attorneys 
routinely garner the lion's share of settlements.'' \744\
---------------------------------------------------------------------------

    \742\ Hensler, et al., supra note 669, at 5, 14.
    \743\ Study, supra note 3, section 8 at 3.
    \744\ Hensler et al., supra note 669, at 18.
---------------------------------------------------------------------------

    With respect to a paper cited by several commenters as supporting 
the conclusion that attorney's fees are higher than shown by the 
Bureau's Study and ``rarely less than 75 percent of the amount actually 
paid to consumers,'' the paper does not appear to have reported the 
overall mean for attorney's fees of all the cases analyzed as a 
percentage of payments.\745\ Instead, the attorney's fee data in that 
paper was reported for ``claim types'' that were subsets of claims 
under particular statutes.\746\ The data was not reported for cases 
under each statute as a whole. Thus, the 75 percent figure appears to 
be an estimate of the various percentages data that were reported for 
each claim type within the various statutes.\747\ The paper analyzed a 
set of class actions from a single Federal district court concerning 
claims under the FDCPA, TCPA, FCRA, and EFTA. As noted above in Part 
VI.B.3 in a discussion of a separate study cited by commenters,\748\ 
many of those statutes cover activity that extends beyond consumer 
financial services, to include nonfinancial goods or services that were 
neither included in the Study nor are subject to the final rule.\749\ 
Indeed, of those cases analyzed in the paper, only the FDCPA cases and 
a few of the TCPA debt call cases would likely involve consumer 
financial products and services covered by this rule. For those cases, 
the relative proportion of attorney's fees to consumer payout does not 
appear inconsistent with what was found in the Study for cases with 
smaller class settlements.
---------------------------------------------------------------------------

    \745\ See the Section 1022(b)(2) Analysis below in Part VIII for 
a related discussion of attorney's fees.
    \746\ For example, cases asserting claims under the FDCPA were 
divided into four claim-types: Bad affidavit; bad debt; formality; 
and litigation threat. Johnston, supra note 520, at 31.
    \747\ Johnston, supra note 520, at 41.
    \748\ Shepherd, supra note 515, at 2, 13.
    \749\ For example, as discussed more fully above regarding ``no-
injury statutes'' in ``Monetary Relief Provided,'' FCRA class 
actions can involve merchants and employers. EFTA class actions in 
this period were often ATM ``sticker'' claims that no longer violate 
EFTA. As the proposal noted, the rule would have no impact on such 
cases because they are either brought against merchants, or by non-
customers who do not have contractual relationships with a provider. 
FDCPA class actions cover the collection of all types of debt, 
including debt that does not arise from a consumer financial product 
or service (such as taxes, penalties and fines), whereas the Study 
and the rule only covered collection of debt to the extent it was a 
collection on a consumer financial product or service. Finally, TCPA 
class actions often involve marketing communications unrelated to 
consumer finance. Such claims are often brought against a merchant 
or a company with whom the consumer otherwise has no relationship 
(contractual or otherwise).
---------------------------------------------------------------------------

    Specifically, the paper analyzed 26 FDCPA class action settlements 
and found the proportion of attorney's fees to cash relief to be 
between 62 percent and 84 percent and the proportion of attorney's fees 
to cash payments to be 64 percent to 100 percent.\750\ Accordingly, the 
ratio of attorney's fees to nominal

[[Page 33307]]

relief is consistent with that reported in the Study for settlements of 
$100,000 or less which showed that the proportion of attorney's fees to 
gross relief for such cases averaged 55.9 percent.\751\ The Study did 
not disaggregate the data with respect to fee awards in relation to 
cash payout by size of settlement or type of claim, but the ratios 
likely would have been similar to what the paper found for settlements 
of that size given the data reported in the Study on the attorney's 
fees by size of settlement.\752\ As for comments that criticized high 
attorney's fees in settlements that provided for cy pres relief, the 
Study's analysis of cash payments to consumers did not include any 
additional value of cy pres relief. Indeed, the Study found relatively 
few consumer finance settlements providing for cy pres relief without 
also providing relief directly to consumers--28 out of 419 analyzed. 
Had the Bureau included cy pres in its analyses, the attorney's fees 
ratios would have been even lower. For these reasons, the Bureau finds 
that the attorney's fees awarded in cy pres cases, when they occur, do 
not undermine the findings that class actions are in the public 
interest insofar as cy pres payouts are above and beyond the amounts 
reported by the Study.\753\
---------------------------------------------------------------------------

    \750\ Johnston, supra note 520, at 31. That paper also found the 
average nominal settlement in those cases to be relatively low: 
$58,724.
    \751\ Study, supra note 3, section 8 at 34 tbl. 11.
    \752\ Id.
    \753\ Id. section 8 at 4 n.5 and n.9.
---------------------------------------------------------------------------

    Many of the commenters criticized the role of plaintiff's attorneys 
in class action settlements, asserting that they often have improper 
conflicts of interest with absent class members. However, judicial 
review of class action settlements, including the portion of any 
settlement allocated to the attorneys, is required in part because of 
the potential for such conflicts. Indeed, the Federal Judicial Center 
Manual notes, with respect to class action settlements, that ``the 
parties or the attorneys often have conflicts of interest . . .'' and 
instructs courts on how to manage those conflicts.\754\ In other words, 
while the commenters are correct that class actions can pose potential 
conflicts of interest between plaintiff's attorneys and absent class 
members, courts are explicitly aware of these conflicts and, for those 
reasons among others, have procedures in place to review class action 
settlements. While many commenters expressed their belief that courts 
do not adequately review class action settlements for fairness or 
reasonableness, there are numerous examples of courts that, in 
exercising their power to review class action settlements, found 
certain aspects of settlements to be unfair or unreasonable.\755\ 
Commenters and commentators may debate whether an attorney's fee award 
in a particular case is appropriate, but commenters have not put forth 
evidence to suggest that courts cannot and do not effectively supervise 
class action settlements or attorney's fee awards or that they fail to 
do so in such a way that the entire class action process is rendered 
faulty.\756\
---------------------------------------------------------------------------

    \754\ Federal Judicial Center, ``Manual for Complex 
Litigation,'' at Sec.  13.14 (4th ed. Thomson West 2016). A separate 
section of that manual notes ``[i]n common-fund litigation, class 
counsel may be competing with class members for a share of the fund, 
thus placing a special fiduciary obligation on the judge because 
class members are unrepresented as to this issue.'' Id. Sec.  
14.231.
    \755\ See generally Newberg et al., supra note 65, at Sec.  
13:61, citing many cases. See also In re Bluetooth Headset Products 
Liability Litigation, 654 F.3d 935, 947 (9th Cir. 2011) (describing 
possible signs of collusion, such as ``when counsel receive a 
disproportionate distribution of the settlement, or when the class 
receives no monetary distribution but class counsel are amply 
rewarded'' (quoting Hanlon v. Chrysler Corp., 150 F.3d 1011, 1021 
(9th Cir. 1998)); Crawford v. Equifax Payment Services, Inc., 201 
F.3d 877, 882, 45 Fed. R. Serv. 3d 811 (7th Cir. 2000) (reversing 
settlement approval where it appeared plaintiffs' counsel was ``paid 
handsomely to go away'' and ``the other class members received 
nothing . . . and lost the right to pursue class relief.''). Vought 
v. Bank of America, N.A., 901 F. Supp. 2d 1071, 1100-01 (C.D. Ill. 
2012) (stating that ``[t]he terms of the settlement, despite the 
superficially generous $500,000 cap, ended up being a zero-sum 
framework where the putative attorneys' fees award cannibalized the 
funds that would otherwise have gone to the class'' and denying 
approval). Sobel v. Hertz Corp., 2011 WL 2559565, *13 (D. Nev. 2011) 
(denying approval in part because ``the only components with any 
determinate--or on this record, determinable--value are the 
attorneys' fees, incentive payments, and to some extent the costs of 
notice and administration''). True v. American Honda Motor Co., 749 
F. Supp. 2d 1052, 1078 (C.D. Cal. 2010) (noting that ``there is no 
certainty that class members will receive any cash payments or 
rebates at all,'' then concluding ``to award three million dollars 
to class counsel who may have achieved no financial recovery for the 
class would be unconscionable''). In re TJX Companies Retail Sec. 
Breach Litigation, 584 F. Supp. 2d 395, 406 (D. Mass. 2008) 
(``Similarly, unscrupulous class counsel may agree to conditions on 
a settlement--such as a short timeframe in which to make claims or a 
burdensome claims procedure--in order to obtain additional 
concessions from the defendant that purportedly increase the value 
created by the litigation and that support an enhanced fee 
award.'').
    \756\ One commenter cited a study that the commenter claimed 
supports the proposition that judges are more likely to approve 
class settlements in cases where the claims are weak. Johnston, 
supra note 520, at 13. The Bureau has reviewed that Study and 
disagrees that it supports such a proposition.
---------------------------------------------------------------------------

    Similarly, some industry commenters put forward examples, prior to 
the period analyzed in the Study, of plaintiff's attorneys who engaged 
in unlawful practices such as paying individuals to serve as lead 
plaintiffs or recruiting professional plaintiffs to serve as lead 
plaintiffs in multiple cases. However, no commenters submitted evidence 
to support that such abuses are widespread, nor is the Bureau aware of 
support for that view. Further, the nature of the examples submitted 
indicates that prosecutors and the courts have uncovered and remedied 
such abuses when they occurred. Indeed, in the example cited by one 
commenter that involved plaintiff's attorneys who paid people to be 
lead plaintiffs, those attorneys were criminally charged with 
racketeering, mail fraud, and bribery and pleaded guilty to numerous 
charges.\757\
---------------------------------------------------------------------------

    \757\ Martha Graybow, ``US Shareholder Lawyer Melvyn Weiss to 
Plead Guilty,'' Reuters (Mar. 21, 2008), available at http://www.reuters.com/article/sppage014-n20401632-oistl-idUSN2040163220080321; Business Day, ``Lawyer Pleads Guilty in 
Securities Case,'' N.Y. Times (July 10, 2007), available at http://www.nytimes.com/2007/07/10/business/09cnd-bershad.html?hp.
---------------------------------------------------------------------------

    As to commenters that criticized plaintiff's attorneys as ``self-
interested'' in choosing to bring class action cases that might benefit 
them personally through generation of large fee awards, the Bureau 
recognizes that plaintiff's attorneys are unlikely to be motivated 
purely by altruism and may, indeed, factor the potential to earn a fee 
into their decisions about whether to pursue a case. The Bureau does 
not agree that the pecuniary motives of the plaintiff's attorney in 
pursuing a class action on behalf of absent class members determine 
whether a case ultimately provides relief to consumers or is in the 
public interest, much like the Bureau would not consider a provider's 
profit motive as evidence of whether the provider's product or service 
complies with the law.
    In any event, plaintiff's attorneys are incentivized by the 
prospect of fee awards to pursue relief on behalf of consumers in cases 
where individual recoveries would be small and thus both individual 
consumers and individual attorneys would not have a financial 
motivation to proceed. By design, the class vehicle groups individual 
claims and thereby provides the plaintiff's attorney with the incentive 
to bring them.\758\ The fact that a plaintiff's attorney was motivated 
to bring a class action case by the potential to earn a profit does not 
undermine the validity of the case. Indeed, individual consumers are 
not generally qualified to represent themselves in filing a class 
action, so someone else must bring it for them. As long as courts 
continue to

[[Page 33308]]

review settlements and attorney's fee awards for reasonableness and 
fairness, there is a check on the self-interest of plaintiff's 
attorneys to ensure that it does not prevent consumers from benefitting 
from the class action procedure.
---------------------------------------------------------------------------

    \758\ See, e.g., John C. Coffee, Jr., ``Understanding the 
Plaintiff's Attorney: The Implications of Economic Theory for 
Private Enforcement of Law Through Class and Derivative Actions,'' 
86 Colum. L. Rev. 669, at 677-679 (1986) (stating that, in the 
context of class and derivative actions, ``our legal system has long 
accepted, if somewhat uneasily, the concept of the plaintiff's 
attorney as an entrepreneur who performs the socially useful 
function of deterring undesirable conduct'').
---------------------------------------------------------------------------

    Strain on the courts. A few commenters stated that the rule would 
encourage class action litigation and therefore strain the resources of 
the court system. As noted above in Part VI.A, for the public interest 
standard, the Bureau considers benefits and costs to consumers and 
firms, including more direct consumer protection factors, 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.\759\ The Bureau does 
not believe that the impact of the rule on the resources of the court 
system per se or to the extent it impacts non-consumer product and 
service-related litigation is appropriately considered under this 
standard; this impact does not fall under the Bureau's purposes and 
objectives.\760\ To the extent any strain on the court system could 
impact consumers bringing claims related to consumer financial products 
and services by, for example, increasing court costs as well as the 
waiting time for court dates or decisions, the Bureau has considered 
this impact in its public interest analysis. The Bureau has also 
considered impacts on providers in their claims related to consumer 
financial products or services. In any event, the Bureau does not 
believe that strain on the court system to be a likely or significant 
outcome of its rule.
---------------------------------------------------------------------------

    \759\ The Bureau uses its expertise to balance competing 
interests, including how much weight to assign each policy factor or 
outcome.
    \760\ See, e.g., Nat'l Ass'n for Advancement of Colored People 
v. FPC, 425 U.S. 662, 667-68 (1976).
---------------------------------------------------------------------------

    The Bureau does estimate that there will be some increased class 
action litigation as a result of the class rule. Indeed, the Section 
1022(b)(2) Analysis below in Part VIII estimates that there will be 
3,021 additional Federal court class actions over a five-year period, 
or 604 Federal cases per year. The Bureau does not agree, however, that 
this increase in class action cases will overburden the Federal court 
system. In the most recent year for which data is available, there were 
673 authorized district court judgeships.\761\ Accordingly, the class 
rule would likely increase the case load of each Federal district judge 
by slightly less than one case per year, which the Bureau believes 
would be a minimal impact. Similarly, there are approximately 11,800 
State court judges of general jurisdiction.\762\ Assuming the same 
number of additional class actions are filed in State courts as in 
Federal courts as a result of the class rule \763\ and that class 
actions can be heard by these judges, each State court judge would face 
an additional 0.05 cases per year, or one case per judge over the 
course of 20 years. The Bureau finds that these increases per judge are 
so small that the increase in the number of class cases caused by the 
class rule would not significantly impact the costs or efficiency of 
administration of the Federal and State court system. However, even if 
the entirety of the strain on the court system fell upon consumers and 
providers, as explained below, the Bureau finds that the relatively 
small impact in the form of additional class action cases is preferable 
to class action cases that could have provided relief to consumers from 
violations of the law being blocked by arbitration agreements or never 
filed at all.
---------------------------------------------------------------------------

    \761\ United States Courts, Authorized Judgeships, http://www.fjc.gov/history/home.nsf/page/research_categories.html http://www.uscourts.gov/sites/default/files/allauth.pdf (last visited Jun. 
23, 2017).
    \762\ Nat'l Ctr. for State Courts, ``Number of Authorized 
Justices/Judges in State Courts, 2010,'' (Court Statistics Project 
2012), available at http://www.courtstatistics.org/~/media/
Microsites/Files/CSP/SCCS/2010/
Number_of_Authorized_Justices_and_Judges_in_State_Courts.ashx.
    \763\ For the basis for this assumption, see the detailed 
discussion in the Section 1022(b)(2) Analysis below in Part VIII.
---------------------------------------------------------------------------

    To the extent that this small impact on the court system occurs, 
the Bureau finds that resolution of the additional class cases will 
provide relief for consumers and the threat of liability in those cases 
will deter providers from violating the law and therefore that the 
impact on the court system is justified. In other words, the Bureau 
finds that a relatively small impact on the court system in the form of 
additional class action cases is preferable to class action cases that 
could have provided relief to consumers from violations of the law 
being blocked by arbitration agreements or never filed at all. 
Accordingly, the impact on the court system from the class rule does 
not detract the Bureau's finding that the class rule is in the public 
interest.
    Harm to relationships between customers and providers. As to 
commenters that contended that the class rule is not in the public 
interest because it would harm relationships between consumers and 
their financial institutions because the availability of class actions 
discourages informal resolution of disputes, the Bureau does not agree. 
The Bureau does not believe that the mere possibility of obtaining 
relief through a class action, or the pendency of a putative class 
action, will materially affect the number of consumers who seek to 
resolve complaints informally. Nor does the Bureau believe that class 
action exposure or the pendency of a class action will reduce the 
frequency with which providers will agree to informal resolution. If 
anything, the Bureau believes the reverse to be true as companies may 
be more likely to resolve complaints informally to reduce the risk that 
a consumer initiates a class action and, if a putative class action is 
pending, to reduce the likely class recovery as the class action 
settlement may deduct the amount of the company's informal relief 
provided to customers when calculating damages.\764\
---------------------------------------------------------------------------

    \764\ For example, in 17 of the 18 Overdraft MDL settlements 
analyzed in the Study, the settlement amounts and class members were 
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. 
Study, supra note 3, section 8 at 46 n.63.
---------------------------------------------------------------------------

    Federalism concerns. In response to the research center commenter 
that contended that the class rule will encourage ``inverse 
federalism,'' the Bureau notes that this argument rests on the premise 
that providers that face only exposure to individual arbitrations or 
litigation will not deem it necessary to conform to the most protective 
State laws, whereas the availability of class relief will result in 
compliance with such laws and have spillover effects on other States. 
Thus, like the objection based on the impact of the rule on innovation, 
this comment conceded the key predicates on which the class rule 
rests--that class actions deter violations of the law.
    The Bureau does not agree that to the extent the class rule 
increases compliance with the most protective State laws and has 
spillover effects in other States such a result would represent 
federalism in reverse. Companies that operate in multiple States have a 
choice of either acting differently in different States depending upon 
the permissiveness of State law or acting uniformly in a manner 
consistent with the most consumer-protective State law. The Federal 
system does not presuppose that a company may choose to so cabin its 
exposure in certain States (e.g., by entering into arbitration 
agreements) so as to enable it to ignore the laws of more protective 
States. Thus, if the result of the class rule is to cause companies to 
comply with protective State laws--and if, as a result, those companies 
choose to adopt the same

[[Page 33309]]

practices in States with fewer restrictions--such an outcome would be 
entirely consistent with the Federal system.
    Impairment of freedom of contract. In response to a group of State 
attorneys general that contended that the class rule harms the public 
interest because it reduces parties' freedom of contract, the Bureau 
notes that consumer finance contracts are not negotiated; they are 
almost always standard-form contracts that consumers may either choose 
to sign in order to obtain the product or not. Further, the Study's 
consumer survey of credit card customers found that consumers did not 
mention dispute resolution features as relevant to them when shopping 
for credit cards and chose dispute resolution last on a list of nine 
features that influenced their decision of whether to choose a 
particular credit card.\765\ These findings suggest that consumers do 
not consider dispute resolution when obtaining consumer financial 
products.\766\ The survey further found that consumers generally do not 
understand the consequences of entering into a contract that includes 
an arbitration agreement.\767\ Thus, while it is true that in certain 
covered markets the rule will eliminate the option for consumers to 
choose a contract on the basis of its dispute resolution procedures, 
the Bureau does not view that as negatively impacting consumers' 
freedom of contract, in practice. Furthermore, to the extent that the 
class rule affects the providers' freedom of contract, the Bureau notes 
that there are any number of laws and regulations that take precedence 
over the unfettered freedom of contract in consumer finance. For 
example, State usury laws limit the interest than can be charged to 
consumers who borrow money,\768\ State and Federal consumer protection 
laws establish certain minimum standards which cannot be varied by 
contract, and State common law typically does not permit enforcement of 
contractual terms that are unconscionable.\769\ The Bureau therefore 
finds that, to the extent the class rule has any impact on the freedom 
of contract, that limited impact to consumers and providers' freedom of 
contract is justified by the consumer protection and other public 
interest benefits of the class rule, discussed herein. Put another way, 
the commenters did not explain why consumers' freedom to contract (for 
products with form contracts) should take precedence over their liberty 
to engage with providers more likely to comply with consumer protection 
laws. Similarly, the Bureau believes that any limited impact the class 
rule may have on consumers' freedom of contract and, in turn, consumers 
ability to avoid contact with plaintiff's attorneys, is justified for 
all the reasons discussed herein.
---------------------------------------------------------------------------

    \765\ Id. section 3 at 11-15.
    \766\ This also addresses the comment that consumers do have a 
choice regarding whether to enter into contracts with arbitration 
agreements. The survey demonstrated that dispute resolution was not 
something most consumers considered at the time they acquired a 
product. In any event, the Study showed that for some products, 
there was almost no option for a consumer who did not want an 
arbitration agreement. Id. section 2 at 6-26.
    \767\ Id. section 3 at 18.
    \768\ E.g., Tex. Fin. Code Ann. Sec.  302.001 (``The maximum 
rate or amount of interest is 10 percent a year except as otherwise 
provided by law.''); N.Y. Banking Law Sec.  14-a (``The maximum rate 
of interest . . . shall be sixteen per centum per annum.''); Ohio 
Rev. Code Ann. Sec.  1343.01 (``The parties to a bond, bill, 
promissory note, or other instrument of writing for the forbearance 
or payment of money at any future time, may stipulate therein for 
the payment of interest upon the amount thereof at any rate not 
exceeding eight per cent per annum payable annually, except as 
authorized in division (B) of this section.'').
    \769\ E.g., Richard A. Lord, ``Williston on Contracts'' at Sec.  
18.1 (Thomson Reuters, 4th ed. 2010) (``[W]hile freedom of contract 
has been regarded as part of the common-law heritage . . . courts of 
equity have often refused to enforce some agreements when, in their 
sound discretion, the agreements have been deemed 
unconscionable.''). See also Gandee v. LDL Freedom Enters., Inc., 
293 P.3d. 1197, 1199-1202 (Wash. 2013) (finding arbitration 
agreement unconscionable where agreement required arbitration to 
take place in Orange County, California; contained provision 
shifting all costs to losing party; and shortened statute of 
limitations from four years to 30 days); Newton v. Am. Debt 
Services, Inc., 854 F. Supp. 2d 712, 722-27 (N.D. Cal. 2012) (same, 
where agreement was part of an adhesion contract; was 
inconspicuously located within the contract; deprived plaintiff of 
statutory rights; required plaintiff to arbitrate in Tulsa, 
Oklahoma; and gave defendant unilateral right to choose arbitrator, 
among other things); Bragg v. Linden Research, Inc., 487 F. Supp. 2d 
593, 605-11 (E.D. Pa. 2007) (same, where agreement was included in a 
lengthy paragraph under the benign heading ``General Provisions;'' 
consumer was required to advance a significant share of the fees; 
and venue was limited to San Francisco, among other things).
---------------------------------------------------------------------------

    Public policy concerning arbitration and legal uncertainty. Lastly, 
with respect to commenters' assertion that the class rule contravenes 
public policy and Supreme Court precedent culminating in AT&T v. 
Concepcion, the Bureau notes that this assertion stems from the general 
public policy established by Congress in passing the Federal 
Arbitration Act. But the Supreme Court has also acknowledged that this 
general `` `liberal federal policy favoring arbitration agreements' '' 
may be overridden in specific instances where ``Congress itself has 
evinced an intention to preclude a waiver of judicial remedies for the 
statutory rights at issue.'' \770\ The Bureau further notes that 
section 1028 of the Dodd-Frank Act provides the Bureau with authority 
to regulate arbitration agreements.\771\ To do so, the Bureau must 
find, consistent with the Study, that doing so is in the public 
interest and for the protection of consumers. For all of the reasons 
discussed herein, the Bureau finds that class rule meets the standard 
for the Bureau to exercise its section 1028 authority.
---------------------------------------------------------------------------

    \770\ Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 26 
(1991) (citing Moses H. Cone Memorial Hospital v. Mercury 
Construction Corp., 460 U.S. 1, 24 (1983)).
    \771\ Compucredit Corp. v. Greenwood, 132 S. Ct. 665 (2012).
---------------------------------------------------------------------------

    In response to commenters' concerns regarding the legal uncertainty 
that may follow from the class rule that may create potential liability 
for covered providers, the Bureau does not believe that the rule 
creates any uncertainty as to the type of actions to which it would 
apply. Rather, the Bureau believes that the regulation text is clear 
that the final class rule applies to all State and Federal class 
actions, as discussed more fully in the section-by-section analysis to 
Sec.  1040.4(a)(2) below in Part VII. To address any potential 
confusion, the Bureau intends to develop a suite of compliance 
materials for new part 1040, just as it has done with the other 
regulations it has issued. Nor does the Bureau believe that the rule 
creates any uncertainty as to the scope of preemption under the Federal 
Arbitration Act, since the Supreme Court has been quite clear that 
Congress can authorize exceptions to the FAA by statute as Congress did 
in section 1028.
    Moreover, to the extent that covered entities have the ability to 
challenge legislation or rulemaking through the litigation process or 
otherwise, there is always some degree of uncertainty with respect to 
any statute or rulemaking. If the potential for that type of legal 
uncertainty discouraged the adoption of new legislation or regulations, 
new legislation or regulations would rarely occur. For this reason, the 
Bureau finds that the potential for legal uncertainty, if any, does not 
undermine a finding that the class rule is in the public interest.
    Impact on certain State laws. The Bureau disagrees with industry 
commenter that asserted that the proposal was not in the public 
interest because of its potential effect on Utah's law authorizing 
class-action waivers in closed-end consumer credit contracts.\772\ As 
relevant here, the Bureau has found that certain limitations on the use 
of pre-dispute arbitration agreements related to class waivers are in 
the public interest and for

[[Page 33310]]

the protection of consumers. As noted above, the Bureau has determined 
that eliminating class actions reduces and weakens consumer protections 
because the remaining forms of dispute resolution are insufficient. In 
addition, as discussed in the Section 1022(b)(2) Analysis, the Bureau 
does not believe that a disclosure-focused regulation would address the 
market failure the Bureau has identified in this rule.\773\ 
Accordingly, these findings are equally applicable where a State law 
authorizes the use of class waivers in arbitration agreements that 
apply to consumer financial products and services covered by this final 
rule, such as the Utah law does with respect to consumer credit 
contracts.\774\ Based on the Bureau's findings, even if such a law 
would conflict with the class rule to the extent it allows providers to 
rely on class waivers in arbitration clauses in the absence of the 
class rule, the class rule is in the public interest and for the 
protection of consumers and affords consumers greater protections than 
such a State law. The Bureau also believes that a uniform approach to 
the conduct covered by this rule across the States is consistent with 
the goal of promoting consistency in compliance and a level playing 
field across the providers covered by the rule.\775\
---------------------------------------------------------------------------

    \772\ Utah Code 70C-3-14.
    \773\ Moreover, the Bureau has emphasized the importance of the 
coverage of extensions of consumer credit in the rule, as it did in 
the Study, based on date gathered since the adoption of the Utah law 
in 2006 by searching cases in Federal courts including any cases in 
Utah Federal court or in other courts based on choice of Utah law.
    \774\ The commenter suggested other States have similar laws but 
provided no citations to those laws nor is the Bureau aware of any.
    \775\ As to the commenter concerned about potential preemption 
of States' laws regarding security freezes, when a State law 
provides a private right of action and does not explicitly prohibit 
class claims, then claims under that law generally may be classable 
under Federal Rule 23 or an analogous State law. In such a 
situation, the class rule provides that arbitration agreements 
cannot be used to block class actions. However, when a State law 
precludes class actions for violations of that State law, the class 
rule will not alter that legislative decision.
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    It also bears noting that, as described in Part VI.A above, a group 
of State-legislator commenters argued that the proposed class rule was 
in the public interest precisely because Federal law currently 
undermines States' ability to pass laws that will be privately 
enforced, measure the efficacy of those laws, or observe their 
development.

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

    As described above, in the proposal, the Bureau preliminarily 
found--in light of the Study, the Bureau's experience and expertise, 
and the Bureau's analysis--that a comparison of the relative fairness 
and efficiency of individual arbitration and individual litigation was 
inconclusive and thus that a complete prohibition on the use of pre-
dispute arbitration agreements in consumer finance contracts was not 
warranted. Accordingly, the class proposal would not have prohibited 
covered entities from continuing to include arbitration agreements in 
consumer financial contracts generally; providers would still have been 
able to include them in consumer contracts and invoke them to compel 
arbitration in court cases that were not filed as class actions. In 
addition, the class proposal would not have foreclosed class 
arbitration; it would be available when the consumer chooses 
arbitration as the forum in which he or she pursues the class claims 
and the applicable arbitration agreement permits class arbitration.
    However, in light of historical evidence that there have been 
serious concerns about the fairness of thousands of past arbitration 
proceedings, and that the Study identified some fairness concerns about 
certain current arbitration agreement provisions and practices, the 
Bureau believed that it was appropriate to propose a system to 
facilitate monitoring and public transparency regarding the conduct of 
arbitrations concerning covered consumer financial products and 
services going forward. Specifically, the Bureau proposed Sec.  
1040.4(b), which would have required providers to submit certain 
arbitral records to the Bureau that the Bureau would then further 
redact, if necessary, and publish. The Bureau preliminarily found this 
part of the proposal to be consistent with the Bureau's authority under 
section 1028(b) including finding that this part was in the public 
interest and for the protection of consumers. The Bureau made this 
preliminary finding after considering such countervailing 
considerations as the costs and burdens to providers.
    This section discusses the bases for the preliminary findings, 
comments received, and the Bureau's further analyses and final findings 
pertaining to the monitoring rule. Similar to the Bureau's analysis of 
the statutory elements pertaining to the class rule, this discussion 
first addresses whether the monitoring rule is for the protection of 
consumers, and then addresses whether the rule is in the public 
interest. As discussed briefly in the findings and in the section-by-
section analysis of Sec.  1040.4(b) below, the Bureau is expanding the 
list of records that must be reported to the Bureau as urged by some 
commenters in order to better promote both statutory objectives. The 
Bureau is also finalizing its proposal to publish the reported records, 
with appropriate redactions, on the Bureau's Web site.
1. The Monitoring Rule Is for the Protection of Consumers
    In the proposal, the evidence before the Bureau, including the 
Study, was inconclusive as to the relative fairness and efficacy of 
individual arbitration compared to individual litigation. The Bureau 
remained concerned, however, that the historical record demonstrated 
the potential for consumer harm in the use of arbitration agreements in 
the resolution of individual disputes. 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 Bureau preliminarily found, consistent with the Study, that the 
monitoring proposal would have positive outcomes that would be for the 
protection of consumers. Specifically, the Bureau preliminarily found 
that the collection of arbitration documents would help the Bureau 
monitor how arbitration proceedings and agreements evolve and to see if 
they evolve in ways that harm consumers.\776\ The collection of 
arbitration claims would provide transparency regarding the types of 
claims consumers and providers are bringing to arbitration and would 
allow the Bureau to monitor the raw number of arbitrations.
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    \776\ As explained in Part VI.A the transparent application of 
laws has general benefits to society and is therefore a factor that 
the Bureau considers as a part of the public interest analysis. In 
this section, however, ``transparency'' is used in a different sense 
to refer to access for both the Bureau and the public to information 
related to arbitrations that serves to directly facilitate 
deterrence and redress.
---------------------------------------------------------------------------

    While the Study data identified only hundreds of arbitrations per 
year filed with the AAA in selected markets, in the period before the 
Study, there were tens of thousands of arbitrations per year, largely 
filed by providers. For instance, a large increase in the volume of 
provider-filed claims identified by the Bureau under the monitoring 
rule could suggest a need to monitor for potential fairness issues 
associated with large-scale debt collection arbitrations, such as those 
historically filed by providers before NAF and the AAA. The collection 
of awards would provide

[[Page 33311]]

insights into the types of claims that reach the point of adjudication 
and the way in which arbitrators resolve these claims. The collection 
of correspondence on nonpayment 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 or otherwise act in ways that prevent consumers from 
accessing dispute resolution.
    The Bureau also stated in the proposal that, more generally, the 
collection of these documents would help the Bureau monitor consumer 
finance markets for risks to consumers, potentially providing the 
Bureau and the public 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, and the extent 
to which providers may have adopted one-sided agreements in an attempt 
to avoid liability altogether by discouraging consumers from seeking 
resolution of claims in arbitration. Finally, monitoring would allow 
the Bureau to take action against providers that harm consumers.\777\
---------------------------------------------------------------------------

    \777\ In the proposal, the Bureau treated the question of 
whether the use of individual arbitration in consumer finance cases 
is in the public interest and for the protection of consumers as 
discrete from the question of whether some covered persons are 
engaged in unfair, deceptive, or abusive acts or practices in 
connection with their use of individual arbitration agreements. The 
Bureau emphasized in the proposal that it intended to continue 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.
---------------------------------------------------------------------------

Comments Received
    Some commenters opposed the monitoring proposal, though they were 
split on whether it was inadequate to protect consumers in light of 
concerns about the fairness of arbitration or whether action by the 
Bureau was not warranted at all.
    On one side, a consumer advocate commenter suggested that the 
Bureau adopt what it deemed a stronger alternative to the monitoring 
proposal \778\ in which it would identify and ban a number of specific 
practices in arbitration agreements and proceedings, such as fee-
shifting provisions requiring the losing party in the arbitration to 
pay the fees of the winning party. The same commenter expressed the 
concern that fee-shifting could harm consumers because the major 
arbitration administrators currently do not have any in forma pauperis 
provisions (which allow impoverished consumers to file arbitrations 
without paying filing fees). Another consumer advocate commenter 
contended that the proposal did not go far enough, asserting that law-
breaking companies are unlikely to provide documents to the Bureau 
pursuant to the proposed monitoring rule, and thus the rule might not 
accomplish the Bureau's goals.
---------------------------------------------------------------------------

    \778\ Many of the comments on this issue urged the Bureau to 
adopt a total ban on arbitration agreements in contracts for 
consumer financial products and services. Those comments are 
addressed above in Section VI.B. This section addresses only those 
comments that urge the Bureau to take action regarding arbitration 
other than a total ban and issues related to the class rule.
---------------------------------------------------------------------------

    On the other side, some industry commenters wrote in general 
opposition to the Bureau's monitoring proposal, asserting that the 
record before the Bureau did not warrant taking action with regard to 
the fairness of arbitration proceedings. One industry commenter made 
several arguments in opposition to the monitoring proposal generally. 
First, the commenter asserted that the Study found no evidence of harm 
in arbitrations that warranted the Bureau's intervention. Next, the 
commenter asserted that the Bureau did not meet its burden to show that 
monitoring and publication were in the public interest and for the 
protection of consumers because the Study's assessment of AAA 
arbitrations did not show that arbitration was unfair to consumers. 
Finally, the commenter asserted that this must be so because the Bureau 
did not propose to also regulate post-dispute arbitration agreements. 
Another industry commenter asserted that, based upon its review of the 
Bureau's consumer complaints database, consumers are not experiencing 
unfairness in arbitration that warranted the proposed monitoring rule. 
An industry trade association commenter criticized the Bureau's 
citation of NAF as an example of the risks posed by individual 
arbitration to consumers as a red herring on the grounds that NAF is no 
longer an active risk to consumers as very few agreements currently 
specify NAF as an administrator, and that consumers are free to seek a 
different administrator even if NAF is specified in the agreement.
    By contrast, many commenters supported the Bureau's preliminary 
finding that monitoring would have positive outcomes for consumers and 
for the public. A group of State attorneys general, nonprofit, 
individual, Congressional, consumer advocate, academic, industry, 
consumer law firm, and individual commenters wrote in general support 
of the Bureau's monitoring proposal. More specifically, the group of 
State attorneys general and nonprofit commenters supported the Bureau's 
preliminary finding that the collection and publication of documents 
would be valuable because it would help the Bureau and the public 
better understand arbitration generally. The academic commenters 
observed that the past existence of NAF provided a case study on the 
need for the transparency that the Bureau's monitoring proposal would 
provide. The academic commenters also suggested that NAF may have 
stopped certain practices sooner had more information about the 
outcomes of its arbitration proceedings been publicly available 
earlier.
Responses to Comments and Final Findings
    The Bureau has carefully considered the comments received on the 
monitoring proposal and further analyzed the issues raised in light of 
the Study and the Bureau's experience and expertise. Based on all of 
these sources and for the reasons discussed above, in the proposal, and 
further below, the Bureau finds that requiring providers to submit 
specified, redacted arbitral records and then publishing redacted 
versions of these records will be for the protection of consumers by 
helping the Bureau and the public monitor for the risks to consumers in 
the underlying consumer finance markets.
    The Bureau believes that such monitoring is important to this 
ongoing risk assessment because the kinds of fairness concerns that 
have been raised about some arbitration proceedings historically could 
prevent consumers from obtaining redress for legal violations and 
expose them to harmful practices in arbitrations filed against them. 
While the Bureau expects that the number of consumer-filed individual 
arbitrations will remain low for the reasons discussed above, to the 
extent that arbitrations occur (and consumers are precluded from 
proceeding in court), it is in their interest that the proceeding be 
fair. The Bureau believes that the monitoring rule is for the 
protection of consumers because the awareness that certain basic 
information about disputes filed in arbitration will be available to 
the public will tend to discourage unfair and unlawful conduct by 
provides of both consumer financial products and services and arbitral 
services. In the event that transparency alone is not sufficient, the 
monitoring rule will also facilitate appropriate follow-up actions by 
the Bureau and others to protect consumers.

[[Page 33312]]

    Specifically, the Bureau finds that the monitoring rule is for the 
protection of consumers for several reasons. It would deter potential 
wrongdoers who would know that their practices, with respect to both 
their use of arbitration proceedings and to their provision of consumer 
financial products and services, will be made public and would 
facilitate redress for related harms to consumers. Additionally, the 
Bureau finds that the rule will allow the Bureau and the public to 
better understand arbitrations that occur under arbitration agreements 
entered into after the compliance date and to determine whether further 
action is needed to ensure that consumers are being protected. The 
materials the Bureau is requiring providers to submit in redacted 
form--similar to the AAA materials the Bureau reviewed in the Study--
will allow the Bureau to more broadly monitor how arbitration 
proceedings are conducted, what provisions are contained in the 
underlying arbitration agreements, and whether providers are taking 
steps to prevent consumers from being able to seek relief in 
arbitration.
    In particular, the Bureau finds, consistent with the Study, that 
the documents the Bureau collects will provide the Bureau with 
different and useful insights relevant to the above-mentioned 
assessment of risks to the consumers. The collection of arbitration 
claims will provide transparency regarding the types of claims 
consumers and providers are bringing to arbitration and the number of 
arbitrations filed,\779\ and the collection of awards will provide 
insights into the types of claims that reach the point of adjudication 
and the way in which arbitrators resolve these claims. The collection 
of arbitration agreements, when considered with other arbitral 
documents, will 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, as noted before, the collection of correspondence regarding 
nonpayment of fees and non-compliance with due process principles will 
allow the Bureau to understand the extent to which providers do not 
meet the arbitral administrators' fairness standards and to identify 
when consumers are harmed by providers' nonpayment of fees.
---------------------------------------------------------------------------

    \779\ See, e.g., Preliminary Results, supra note 150 at 61; 
Study, supra note 3, section 5 at 9. 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).
---------------------------------------------------------------------------

    The Bureau notes that the two categories of documents it is adding 
to what it had proposed will protect consumers by providing the Bureau 
and the public further insights into the risks that the use of 
arbitration agreements may pose for consumers in the covered consumer 
finance markets. The collection of answers to arbitral claims, required 
by new Sec.  1040.4(b)(1)(i)(B), will supplement the Bureau's 
collection of claims and awards and will provide additional insights by 
providing a more balanced understanding of the facts (or disputes 
regarding the facts) in an arbitration proceeding, especially in cases 
where no award is issued. The collection of provider-filed motions in 
litigation in which they rely on arbitration agreements (and the 
collection of the underlying arbitration agreements that are invoked in 
such proceedings), as required by new Sec.  1040.4(b)(1)(iii), will aid 
the Bureau in determining the frequency with which providers compel 
arbitration in response to individual litigation claims as well as to 
monitor the content of arbitration agreements for reasons similar to 
those described above. The Bureau also finds that this collection, in 
conjunction with the other arbitral records it will receive, will over 
time help track whether such claims are ultimately heard in arbitration 
rather than being dropped entirely, which could in turn shed more light 
on the extent to which consumers are deterred from pursuing individual 
claims more generally because of arbitration agreements.\780\
---------------------------------------------------------------------------

    \780\ The Bureau has no practical way to determine when a 
consumer was inclined to file some sort of individual claim, in 
litigation or arbitration, but was deterred by the prospect of an 
arbitration agreement. With the new requirement the Bureau will be 
able to measure directly the extent to which individual litigation 
filings are dismissed by a provider-filed motion to compel 
arbitration, and the extent to which those consumers try to press 
their claims in an individual arbitration proceeding. If few 
consumer-filed individual arbitrations are filed after the dismissal 
of individual litigation cases dismissed pursuant to provider 
motions, an inference may be made that the net effect of arbitration 
agreements is to discourage individual claims.
---------------------------------------------------------------------------

    The Bureau further finds that the collection of these documents 
will enhance the Bureau's ability to protect consumers by monitoring 
consumer finance markets for risks to consumers. The collection of 
these documents will provide another source of information to help the 
Bureau and others understand the markets in which claims are brought 
more broadly and how consumers and providers interact. For example, the 
collection of claims and awards will provide additional information 
about the types of issues that consumers and providers face that are 
not or cannot be resolved informally, including those issues that 
appear to give rise to repeat claims. This monitoring may facilitate 
the ability of the Bureau and other actors to address emerging market 
concerns for the protection of consumers.
    As described above in Part VI.B.2, the Bureau believes that the 
number of consumer-filed individual arbitrations is likely always to be 
too low to provide optimal levels of deterrence and redress for legal 
violations affecting groups of consumers, and thus that greater 
advancements to the protection of consumers and public interest derive 
from the class rule. Nevertheless, the Bureau notes, as described 
further below, that some commenters expressed concern that the records 
from individual arbitrations would trigger increased scrutiny by 
regulators and increased litigation risk with regard to the disputed 
conduct by the affected financial services providers. The Bureau agrees 
with these commenters' underlying assumption that the monitoring rule 
would tend to increase deterrence and redress for legal violations but 
sees this as a positive impact. This is, in fact, one of the purposes 
of the rule.
    In addition, if sunlight is not a sufficient disinfectant to 
discourage unfair practices in connection with arbitration 
proceedings,\781\ the monitoring rule will better position the Bureau 
to address conduct or practices that impede consumers' ability to bring 
claims against their providers, for instance, if a particular company 
was routinely not paying arbitration fees and thus preventing 
arbitrations against it from proceeding.\782\
---------------------------------------------------------------------------

    \781\ See Louis. D. Brandeis, ``Other People's Money--and How 
the Bankers Use It'' at 62 (Washington, National Home Library 
Foundation ed., 1933) (``Publicity is justly commended as a remedy 
for social and industrial diseases. Sunlight is said to be the best 
of disinfectants; electric light the most efficient policeman.'').
    \782\ Study, supra note 3, section 5 at 66 n.110 (identifying 
over 50 instances of nonpayment of fees by companies in cases filed 
by consumers).
---------------------------------------------------------------------------

    As noted in the proposal and above, the Bureau intends to draw upon 
all of its statutorily authorized tools to address conduct that harms 
consumers that may occur in connection with providers' use of 
arbitration agreements. For example, the Bureau intends to continue 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

[[Page 33313]]

particular arbitral procedures--constitute unfair, deceptive, or 
abusive acts and practices pursuant to Dodd-Frank section 1031. The 
Bureau expects to pay particular attention to any provisions in 
arbitration agreements that might function in such a way as to deprive 
consumers of their ability to meaningfully pursue their claims.
    With regard to commenters that generally opposed the monitoring 
proposal, the Bureau disagrees with comments suggesting that the Study 
provided no basis for the monitoring proposal or that no consumer harm 
has been shown. As noted above in Parts II and III, the Study 
identified evidence of multiple historical problems with the conduct of 
arbitration, including potential conflicts of interest involving a 
major arbitration administrator, general fairness concerns about the 
filing of thousands of debt-collection arbitrations across multiple 
administrators, failure to pay fees by some individual financial 
services providers, and at least sporadic use of particular clauses in 
arbitration agreements that raise fairness concerns.\783\ Additionally, 
the Study's analysis of pre-dispute arbitration agreements identified 
the prevalence of some provisions that may make arbitration proceedings 
more difficult for consumers.\784\ Further, the Study showed that, in 
the markets covered by the Study, an overwhelming majority of 
arbitration agreements specified 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.\785\ While the Bureau believes that these 
safeguards currently apply to the vast majority of consumer finance 
arbitrations being conducted, this could change over time. 
Administrators, including potentially new ones, may decline to adopt or 
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 agreements may evolve in other 
ways that the Bureau cannot foresee, particularly as the markets reacts 
to the adoption of the class rule. Finally, in response to the 
commenter that asserted that the Bureau's citation of NAF was a red 
herring, the Bureau's citation of NAF was illustrative of what could 
occur and not intended to suggest that NAF was still a problem. The 
commenter did not dispute the Bureau's finding that NAF's past 
practices were problematic, that other administrators such as AAA may 
have identified problematic practices such that they also altered their 
policies in response to NAF's settlement with the Minnesota Attorney 
General, and that a new administrator may replace NAF in the future or 
current administrators may change their standards.
---------------------------------------------------------------------------

    \783\ See Study, supra note 3, section 4 at 2 n.3 and section 5 
at 16-17 and n.29.
    \784\ See generally id. section 2 at 40-44 (identifying 
incidence in pre-dispute arbitration clauses of, inter alia, 
confidentiality and non-disclosure provisions, limits on substantive 
relief, and cost and fee-shifting).
    \785\ Id. section 2 at 34-40; see generally id. section 4.
---------------------------------------------------------------------------

    In addition, as noted by other commenters, State monitoring and 
publication laws have helped identify and stop potentially problematic 
practices. As set out in Part II.C, the California law requiring the 
reporting of arbitration statistics led to the investigations of 
arbitral administrators by city and State regulators,\786\ caused NAF 
to stop administering consumer arbitrations, and may have led to 
additional changes, such as the AAA's voluntary moratorium on debt 
collection arbitrations and JAMS's adoption of fairness standards.\787\ 
The Bureau believes that the facts set out above point to the 
importance of collecting arbitration records and publishing them. Based 
on the above, the Bureau finds, as it set out in the proposal, that it 
is in the public interest and for the protection of consumers for the 
Bureau to monitor providers' use of arbitration agreements and 
arbitration proceedings to determine if there are any changes in the 
overall volume in arbitrations, in the types of arbitrations filed, in 
the outcome of arbitrations, or in the prevalence of certain harmful 
clauses in arbitration agreements.
---------------------------------------------------------------------------

    \786\ Sam Zuckerman, ``S.F. Sues Credit Card Service, Alleging 
Bias: S.F. City Attorney Alleges Bias for Debt Collectors in 
Arbitration,'' sfgate.com (Apr. 8, 2008) (``The complaint cites 
forum statistics showing that of 18,075 cases brought before one of 
its arbitrators from January 2003 to March 2007, a total of 30 
resulted in victories for consumers.'').
    \787\ See AAA Press Release, supra note 102; JAMS Policy on 
Consumer Arbitrations, supra note 140.
---------------------------------------------------------------------------

    In response to a commenter's assertion that the Study's analysis of 
AAA arbitrations did not demonstrate that arbitration was unfair to 
consumers, the Bureau disagrees that the monitoring rule must only be 
based upon demonstrated unfairness in the status quo. As set out in 
Part VI.B, the Bureau notes that the AAA data merely showed that (1) 
there were very few arbitrations, and (2) the data were inconclusive as 
to whether individual arbitration proceedings lead to better outcomes 
than individual litigation. This data alone does not support a finding 
that individual arbitration is fair, ipso facto. Indeed, as discussed 
above, other AAA data and Study analyses as well as broader historical 
information suggested that continued monitoring is warranted because 
consumer finance arbitration is dynamic and continues to pose a 
potential ongoing risk to consumers.\788\
---------------------------------------------------------------------------

    \788\ Some commenters seemed to suggest that under section 
1028(b) a Bureau rulemaking imposing limitations or conditions on 
arbitration must be based only on data found in the Study. The 
Bureau interprets section 1028(b), in accord with the plain text of 
the statute, to say that any findings supporting the rulemaking must 
be ``consistent with'' the Study. Dodd-Frank Act, section 1028(b) 
(``The findings in such rule shall be consistent with the study 
conducted under subsection (a).''). Moreover, the Bureau notes that 
the Bureau's analysis of the AAA data did flag certain problematic 
practices by providers in arbitration proceedings, such as the 
nonpayment of fees to delay consumer-filed proceedings. Study, supra 
note 3, section 5 at 34 n.69. (The Bureau has similarly received 
consumer complaints involving entities' alleged failure to pay 
arbitral fees.) The Study's analysis of arbitration agreements also 
catalogued problematic clauses as discussed above, and the Study 
recounted several fairness concerns raised in the years preceding 
the study (enforcement actions against NAF, administrators adopting 
due process protocols, and fairness concerns regarding debt-
collection arbitrations raised across multiple administrators as 
discussed in Part III above).
---------------------------------------------------------------------------

    With regard to the commenter that suggested that, because the 
Bureau's proposal did not address post-dispute arbitration, the Bureau 
must have regarded arbitration as fair overall, the Bureau observes 
that section 1028 only authorizes the Bureau to study and regulate the 
use of pre-dispute arbitration agreements.\789\ The Bureau therefore 
did not analyze the use of post-dispute agreements and takes no 
position on their fairness but notes that proceedings pursuant to an 
agreement between parties who are aware of a specific present conflict 
and jointly agree to resolve it through arbitration rather than 
litigation may be different in nature than proceedings subject to pre-
dispute arbitration agreements, which are typically entered into by 
parties not necessarily anticipating future conflict and, in the 
context of consumer finance, are often included in a larger form 
contract rather than being the subject of negotiations between the 
parties. As such, the fact that the Study and proposal did not mention 
post-dispute arbitration does not alter the Bureau's

[[Page 33314]]

overall findings on the fairness of pre-dispute arbitration.
---------------------------------------------------------------------------

    \789\ See Dodd-Frank, section 1028(c).
---------------------------------------------------------------------------

    With regard to the comment that the data in the Bureau's consumer 
complaint database proves that arbitration is not unfair, the Bureau 
notes that its complaints function takes in informal complaints before 
the start of formal dispute resolution such as arbitration. The Bureau 
believes that a low volume of complaints about arbitration in the 
consumer complaint database is not dispositive of the fairness of 
arbitration. Moreover, the monitoring rule does not rest on a finding 
that arbitration as it is occurring today is unfair but rather that 
there is a significant risk that arbitration could operate in the 
future in ways that are injurious to consumers and that monitoring will 
enable the Bureau to mitigate that risk and to address it should it 
occur.
    With regard to the comment that law-breaking providers might not 
submit documents to the Bureau pursuant to the proposed monitoring 
rule, the Bureau agrees that there is some risk of non-compliance, but 
notes that this is true of any regulation that the Bureau implements. 
The Bureau has no reason to believe that any substantial number of 
providers will not comply, such that the Bureau should not implement 
the monitoring rule. Further, the Bureau does not at this time believe 
that the risk of underreporting by providers is likely to be severe 
enough that a different type of intervention is warranted, such as a 
total ban on the use of pre-dispute arbitration agreements or standards 
for arbitration proceedings. As set out in Part VI.B, the Bureau is not 
adopting either intervention instead of monitoring. Nevertheless, the 
Bureau will monitor efforts to comply with the reporting requirements 
of providers over which it has enforcement or supervisory authority.
2. The Monitoring Rule Is in the Public Interest
    In the proposal, the Bureau also preliminarily found that the 
monitoring proposal would be in the public interest. This preliminary 
finding was based upon several considerations, including the 
considerations pertaining to the protection of consumers set out above. 
The Bureau also considered potential benefits stemming from the other 
public interest factors.
    Consistent with the legal standard outlined above, in making its 
preliminary findings, the Bureau also analyzed potential tradeoffs 
under the public interest factors such as the monitoring proposal's 
potential compliance burden on providers, the potential confidentiality 
concerns of providers, and the potential privacy considerations 
affecting consumers and providers.
    The Bureau summarizes comments on these preliminary findings and 
sets out final findings in response to these comments below.
Comments Received
    The Bureau received three general categories of comments in 
response to the public interest factors addressing (1) consistent 
enforcement of consumer laws; (2) issues relating to whether the 
publication component of the monitoring rule in particular was in the 
public interest; and (3) privacy, redaction, and related issues 
associated with the proposal.
    Consistent enforcement of consumer laws. One consumer advocate 
commenter agreed generally that the monitoring proposal was likely to 
provide policymakers, including the Bureau, with additional information 
that would enable it to develop better substantive policies for the 
consumer finance markets. No commenter opposed to the intervention 
commented on this aspect of the Bureau's preliminary public interest 
findings.
    Publication. Several comments addressed whether publication in 
particular was in the public interest. One set of academic commenters, 
State attorneys general, and nonprofit commenters wrote in support of 
the monitoring proposal on the grounds that it would improve 
transparency in consumer finance markets. In addition, a group of State 
attorneys general noted in their comment that publication of arbitral 
records would assist the Bureau and other regulators with analyzing 
arbitration outcomes and would help regulators determine if additional 
regulation of arbitration was necessary. Academic commenters noted 
that, with the exception of California's arbitration disclosure law, 
researchers only have access to those case-level data and documents on 
arbitration proceedings that arbitral administrators permit non-parties 
to see. These commenters noted that access to more comprehensive 
arbitration data would aid their work.
    Another set of commenters asserted that making arbitral decision-
making more transparent to the general public would have such negative 
impacts as to negate a finding that publication is in the public 
interest. One industry commenter argued that the Bureau should not 
publish awards because transparency in the decision-making of 
arbitrators would be detrimental to arbitrators and providers. That is, 
according to the commenter, arbitrators would face disincentives to 
make explicit findings, publication would put the onus on arbitrators 
to keep arbitration fair, and providers would be subject to further 
Bureau scrutiny. By contrast, other commenters argued that such 
transparency was beneficial, for many of these same reasons. For 
instance, academic commenters identified NAF as a case study on the 
importance of making arbitration records transparent, noting that NAF 
kept its arbitration files private until the Minnesota Attorney 
General's office obtained documents, and speculated that NAF may have 
been less likely to enter questionable agreements with certain debt 
collectors had it known its files would be made publicly available. A 
trade association of lawyers representing investors asserted that the 
public has an interest in accessing arbitral records and data. A 
nonprofit commenter suggested that there was a public interest in 
analyzing potential issues with individual arbitration, citing as 
examples secrecy, limited discovery, and arbitrator bias.
    Another set of comments offered differing views on the attention 
that publication would draw to the underlying substantive claims, and 
the providers associated with them, set out in arbitration records. 
Some commenters believed this added attention--to business practices 
and particular providers--was unwarranted. Several industry commenters 
asserted that publication, and the accompanying publicity as to 
business practices identified in arbitration records would lead 
plaintiff's attorneys to bring more frivolous litigation generally, 
including additional class action lawsuits and follow-on individual 
arbitrations. One industry commenter expressed concern that the 
publication of records would subject providers to class actions 
concerning non-compliance with the monitoring rule if providers made 
errors in redacting arbitration documents or if pre-dispute arbitration 
agreements did not comply with the requirements of proposed Sec.  
1040.4(a)(2)(i). Other industry commenters suggested that providers 
would remove pre-dispute arbitration agreements from contracts with 
consumers to avoid the increased exposure to litigation risk associated 
with publication. A commenter that is an association of State 
regulators suggested that the publication would lead to more class 
action litigation, which it contended would exacerbate the difficulties 
State bank examiners face in assessing the risks associated with such 
class actions in their examinations. An industry commenter

[[Page 33315]]

argued that the Bureau should not publish arbitration records because 
the Bureau's consumer complaint database already exists and serves the 
same function in alerting the public to potentially objectionable 
business practices. Another industry commenter suggested that important 
or relevant information in arbitration records should be pursued by the 
Bureau itself, not published for others to see and exploit.
    Another group of commenters focused on other negative impacts on 
financial services providers besides increased litigation risk, 
emphasizing that they viewed arbitral confidentiality as one of the 
main benefits of the process that would be harmed by the proposal. Some 
commenters were concerned that, without confidentiality, providers 
would be subject to reputational risks if arbitrations filed against 
them were public. Some credit union and trade association commenters 
opposed the publication proposal on the grounds that it would expose 
credit unions and their members to reputational risk, especially 
because allegations made in arbitral filings could be taken as fact. 
Other industry commenters further complained that consumer data was to 
be redacted but not information on providers and their employees, 
potentially compromising the privacy of the provider's employees. Other 
industry commenters opposed the Bureau's monitoring proposal on the 
grounds that confidentiality was standard or customary in arbitration, 
and that the Bureau's publication proposal would undermine that. A 
commenter that is an association of State regulators also opposed the 
publication rule on the grounds that it may conflict with State laws on 
the confidentiality of arbitral records.
    Other commenters contended that providers should not be able to 
maintain secrecy about their disputes with customers. A trade 
association of lawyers representing investors contended that the public 
has an interest in accessing arbitral records and data. Some academic 
and nonprofit commenters referenced other types of arbitrations where 
they asserted that results are published with no ill effects (e.g., 
FINRA, labor arbitration, and internet domain name disputes before the 
Internet Corporation for Assigned Names and Numbers, known as ICANN). 
These commenters stated that publication would not deter or impede the 
use of arbitration as a dispute settlement mechanism; instead, they 
asserted that the willingness of these administrators to publish 
arbitration records shows the value of transparency in arbitration 
proceedings.
    Several commenters also argued that the publication of claims and 
awards could help to facilitate the development of consumer protection 
law. A consumer advocate commenter argued that the publication of 
arbitration records is likely to help industry understand what actions 
might violate the law. Several consumer advocate commenters argued that 
the publication of arbitration records is likely to help consumer 
advocates and others advising consumers directly know what issues to 
pursue, in particular when they advocate on behalf of or advise low-
income consumers. A consumer advocate commenter also argued that the 
publication of arbitration records collected from providers would 
permit consumers themselves to avoid harm by becoming aware of certain 
business practices.
    Privacy, redaction, and related issues. Several commenters focused 
on the proposal's provisions concerning redaction of certain consumer 
information prior to submission of arbitral records. For example, some 
asserted that the proposal's redaction provisions would be more 
burdensome to providers than the Bureau estimated. An industry 
commenter asserted that the redaction of arbitration documents, as 
required by proposed Sec.  1040.4(b)(3), would be costly for credit 
unions, taking time and money that they could otherwise use to serve 
their members. Relatedly, a credit union industry commenter requested 
an exemption for credit unions from this requirement because of the 
burdens the monitoring proposal would impose on them. The commenter 
stated that the estimate of $400 per institution to redact documents in 
the proposal's Section 1022(b)(2) Analysis underestimated the cost of a 
program to redact and submit documents to the Bureau.
    In contrast, other commenters agreed with the Bureau's assessment 
of the burden of complying with the proposal as being relatively low, 
but for different reasons. A consumer advocate commenter observed that 
the burden under the monitoring proposal would be minimal. An industry 
commenter argued that the burden would be low because it predicted that 
providers would drop their arbitration agreements in response to the 
risk of increased litigation exposure arising from publication and thus 
few would have to comply with the substantive requirements of this 
rule.
    Second, several industry commenters asserted that the collection of 
both public and non-public information by financial regulators poses a 
threat to consumer privacy. One of these industry commenters asserted 
that the collection of even redacted information could be combined with 
public information to re-identify consumers. Other industry commenters 
expressed concerns that monitoring and publication would expose 
consumers to a risk of privacy and data security violations. Another 
industry commenter suggested that the proposal would force consumers to 
expose their private data without consent. One trade association 
commenter asserted that consumers in debt collection cases may not wish 
to have their personal finances publicly disclosed. (The trade 
association made this comment in the context of opposing the class 
rule, but the Bureau construes this as a comment on privacy concerns 
pertaining to publication). Finally, another industry commenter 
expressed skepticism about permitting government regulators to collect 
data because of a lack of security at regulators, citing examples such 
as a recent Office of the Inspector General report on the security of 
the Bureau's consumer complaint database and issues affecting other 
Federal regulators.\790\
---------------------------------------------------------------------------

    \790\ See Office of the Inspector General, ``Security Control 
Review of the CFPB's Data Team Complaint Database'' (2015), 
available at https://oig.federalreserve.gov/reports/cfpb-dt-complaint-database-summary-jul2015.htm.
---------------------------------------------------------------------------

    Finally, several comments focused on the impact that the 
publication proposal would have on arbitral confidentiality. Some 
commenters were concerned that, without confidentiality, providers 
would be subject to reputational risks if arbitrations filed against 
them were public. Some credit union and trade association commenters 
opposed the publication proposal on the grounds that it would expose 
credit unions and their members to reputational risk, especially 
because allegations made in arbitral filings could be taken as fact. 
Other industry commenters raised a further concern that consumer data 
was to be redacted but not information on providers and their 
employees, potentially compromising the privacy of the provider's 
employees. Other industry commenters opposed publication on the grounds 
that confidentiality was standard or customary in arbitration, and that 
the Bureau's publication proposal would undermine that. A commenter 
that is an association of State regulators opposed the publication rule 
on the grounds that it may conflict with State laws on the 
confidentiality of arbitral records.
    Other commenters agreed with the Bureau that providers should not 
be able to maintain secrecy about their

[[Page 33316]]

disputes with customers in arbitration. A trade association of lawyers 
representing investors contended that the public has an interest in 
accessing arbitral records and data. Some academic and nonprofit 
commenters referenced other types of arbitrations where results are 
published with no ill effects (e.g., FINRA, labor arbitration, and 
internet domain name disputes before the Internet Corporation for 
Assigned Names and Numbers, known as ICANN). Thus, these commenters 
stated that publication would not deter or impede the use of 
arbitration as a dispute settlement mechanism; instead, the willingness 
of these administrators to publish arbitration records shows the value 
of transparency in arbitration proceedings.
Responses to Comments and Final Findings
    The Bureau has carefully considered the comments received on the 
monitoring proposal and further analyzed the issues raised in light of 
the Study and the Bureau's experience and expertise. Based on all of 
these sources, the Bureau finds that requiring providers to submit 
redacted arbitral records and publishing them in redacted form is in 
the public interest. The Bureau finds that the monitoring rule is in 
the public interest because, along with creating deterrence and 
facilitating redress, as described above, it will allow the Bureau to 
better evaluate whether the Federal consumer finance laws are being 
enforced consistently; promote confidence in a fair and efficient 
arbitration system; and facilitate transparency and accountability in 
the broader markets for consumer financial products and services. The 
Bureau also finds that the potential costs and burdens of the 
monitoring rule identified by commenters--including the cost of 
compliance and potential privacy and confidentiality issues--are modest 
and do not overshadow the rule's benefits to the public interest.
    Consistent enforcement of consumer laws. The Bureau finds that the 
monitoring rule is in the public interest because it will 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.'' \791\ As a consumer advocate 
commenter pointed out, with the insight garnered from a fuller 
collection of arbitral records, the Bureau will 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 may warrant further action by the Bureau. The Bureau's 
experience with the Study showed how the analysis of arbitral records 
is likely to provide useful information to policymakers and insights 
into particular consumer financial products and services.
---------------------------------------------------------------------------

    \791\ See generally Dodd-Frank section 1021(b) (setting forth 
the Bureau's purposes).
---------------------------------------------------------------------------

    Publication. The Bureau finds that the publication rule will tend 
to promote confidence in the fairness of the arbitration system for 
covered markets and in the functioning of the markets themselves by 
promoting transparency and accountability generally, beyond the 
specific benefits discussed above for any individual consumers who are 
victims of legal violations or unfair proceedings. While the impact 
will not be as substantial as the class rule given the relatively small 
number of individual arbitrations currently, the logic is related in 
that the Bureau believes that the availability of fair remedial 
mechanisms to enforce compliance with the law will tend to create a 
more predictable, efficient, and robust regulatory regime for all 
participants. Thus, the Bureau believes that the way that publication 
promotes the rule of law--in the form of accountability through 
transparent application of the law to providers of consumer financial 
products or services--contributes to the conclusion that the rule is in 
the public interest.
    The Bureau finds that the publication requirement is in the public 
interest because, as commenters observed, it will promote transparency 
and insight into the conduct of arbitration proceedings. The Bureau 
believes that creating a transparent system of accountability is an 
important part of any dispute resolution system for formally 
adjudicating legal claims. By allowing the public access to redacted 
documents about the conduct of arbitrations, the public will be able to 
learn of and assess consumer allegations that providers have violated 
the law and, more generally, assess the degree to which arbitrations 
may proceed in a fair and efficient manner. By publishing the 
materials, the rule will also promote greater transparency among 
consumers and other members of the public. The Bureau also believes 
that providers may find the increased transparency arising from the 
Bureau's publication of records helpful to monitor best practices and 
avoid potentially unfair conduct or arbitration administrators.
    The Bureau agrees with commenters that noted that publication would 
assist the members of the public and other regulators with analyzing 
arbitration outcomes and would help regulators determine if additional 
regulation of arbitration is warranted. Just as Dodd-Frank section 1028 
called upon the Bureau to publish a report on arbitration to Congress, 
the Bureau finds it is in the public interest to permit anyone to 
review records of arbitration proceedings to better understand the 
workings of arbitration and its impact on consumers. The Bureau 
believes that the publication of claims will lead to transparency by 
revealing to the public the types of claims filed in arbitration and 
whether consumers or providers are filing them. The publication of 
answers will shed some light on the potential merits of these claims. 
The publication of awards will lead to increased transparency by 
revealing how different arbitrators decide cases. The Bureau believes 
that publishing redacted awards may 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. Publication of all of these arbitral records 
collectively could help educate the public and demonstrate the extent 
to which arbitration results in fair processes and outcomes for 
consumers. In particular, the Bureau agrees with the commenter that 
suggested that there is a public interest in analyzing potential issues 
with individual arbitration, such as limited discovery and arbitrator 
bias.
    The publication of redacted awards will also signal 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 informally.\792\ Publication 
may also help develop a more general understanding among consumers of 
the facts and law at issue in consumer financial arbitrations.
---------------------------------------------------------------------------

    \792\ The Bureau already publishes certain narratives and 
outcomes data concerning consumer complaints submitted to 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).
---------------------------------------------------------------------------

    The Bureau believes that publication will assist academic 
researchers with analyzing consumer arbitration. To date,

[[Page 33317]]

academic studies of arbitration \793\ and the Study were made possible 
only by the voluntary participation of the AAA. Such analyses will 
likely be made easier, and more widespread, if more data were available 
on a regular basis, in a standard form, and regardless of the arbitral 
forum.
---------------------------------------------------------------------------

    \793\ See Drahozal & Zyontz, Empirical Study, supra note 233, at 
845 (reviewing 301 AAA consumer disputes); Drahozal & Zyontz, 
Creditor Claims, supra note 233 (follow-on study analyzing 
collection claims by companies in AAA consumer arbitrations).
---------------------------------------------------------------------------

    The Bureau also finds that the publication of records would lead to 
greater transparency of the operation of the markets for consumer 
financial products and services. As noted by commenters, the 
publication of records under the monitoring rule will permit consumers, 
regulators, consumer attorneys, and providers to identify trends that 
warrant further action. 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 Consumer 
Sentinel database \794\) today in conducting their work.
---------------------------------------------------------------------------

    \794\ Fed. Trade Comm'n, ``Consumer Sentinel Network,'' https://www.ftc.gov/enforcement/consumer-sentinel-network (last visited Mar. 
13, 2017) (``Consumer Sentinel is the unique investigative cyber 
tool that provides members of the Consumer Sentinel Network with 
access to millions of consumer complaints. Consumer Sentinel 
includes complaints about: Identity Theft, Do-Not-Call Registry 
violations, . . . Advance-fee Loans and Credit Scams, . . . [and] 
Debt Collection, Credit Reports, and Financial Matters'').
---------------------------------------------------------------------------

    The Bureau agrees with commenters that asserted that the 
publication requirement would help consumer advocates identify issues 
to pursue in assisting consumers, and may help consumers themselves to 
avoid harm by becoming aware of certain business practices. In these 
ways, the Bureau believes that the monitoring rule will 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 further finds that the publication of arbitral records 
will help draw attention to certain business practices by providers. 
This is beneficial because it will help not just consumers but also 
providers understand what actions might violate the law. While not 
binding precedent, arbitral awards in consumer finance cases (not 
currently available to non-parties in most cases) may provide an 
analysis of relevant law and facts that can assist others. Making 
awards available may help consumers identify potentially harmful 
practices by providers and may create incentives for providers to 
identify potentially safer practices. The Bureau agrees with commenters 
that this will assist the development of persuasive reasoning, 
including arbitration and litigation disputes, on issues of consumer 
financial protection.
    While one commenter suggested the publication of awards would act 
as a disincentive for arbitrators to make explicit findings, no 
evidence was presented of this phenomenon. If this were true, it would 
generally only be known as a result of analyzing awards that have 
actually been published. Yet the Bureau is not aware of evidence of 
such a disincentive reflected in arbitration awards made public by 
FINRA and the AAA. The Bureau does agree with the commenter that 
publication will further incentivize arbitrators to keep arbitration 
fair. Arbitrators may feel more pressure knowing that their decisions 
are more likely to be scrutinized, and the Bureau believes that this 
awareness will have a salutary effect on arbitrator decisions, making 
them more likely to be fair.
    With regard to the commenters concerned that providers would be 
subject to reputational risks unless arbitrations were kept 
confidential, the Bureau acknowledges the concern that publication may 
expose providers to reputational risk to the extent that mere 
allegations made in arbitral statements of claim would be taken as 
fact. In response, the Bureau has drafted, as set out below in the 
section-by-section analysis of Sec.  1040.4(b)(1)(i)(B), a provision 
requiring providers to submit answers as well as arbitral counterclaims 
to balance out one-sided accounts and mitigate any perceived 
reputational risk. In any case, as is noted above, relatively few 
providers may be subject to any form of reputational risk according to 
the Bureau's estimate of the number of providers likely to submit 
records to the Bureau. In addition, in the Bureau's experience with 
publishing consumer complaints, reputational risk is not necessarily 
significant when there are low numbers of complaints; and the Bureau 
does not estimate that any one provider is likely to have a significant 
number of arbitrations with public records. The reputational risk 
associated with arbitration is not unique--providers are already 
exposed to reputational risk when complaints are filed in litigation, 
given that such records are public by default. Further, the Bureau 
believes that the potential benefits of transparency to consumers and 
the public at large outweigh any potential reputational risk to 
providers. The Bureau further agrees with commenters, as is noted 
above, that NAF is a key case study demonstrating the importance of 
transparency and how arbitral records can produce private and public 
responses to potentially problematic practices, and notes that the 
default for individual litigation is that records, absent compelling 
reasons, are available to the public.\795\ This is also the case with 
the practice of many arbitral administrators, including FINRA and the 
AAA (for certain types of cases).
---------------------------------------------------------------------------

    \795\ See, e.g., Nixon v. Warner Communications, Inc., 435 U.S. 
589, 597 and n.7 (1978) (noting that historically courts have 
recognized a ``general right to inspect and copy public records and 
documents, including judicial records and documents'').
---------------------------------------------------------------------------

    While one commenter expressed the concern that providers that lose 
in arbitration proceedings in which they are accused of violations of 
consumer protection law may face more scrutiny from the Bureau than 
others, the Bureau finds that the loss of a single dispute with one 
consumer does not necessarily trigger such scrutiny, but to the extent 
this occurs it will benefit the public interest. The Bureau believes 
that any risk of added scrutiny could result in more relief for 
consumers and better business practices by providers deterred by the 
prospect of additional public enforcement or litigation in response to 
arbitral awards identifying certain illegal business practices.
    The Bureau also believes that the publication portion of the rule 
is in the public interest because it will increase transparency and 
accountability with regard to conduct in the underlying consumer 
financial services markets. In contrast to commenters that viewed the 
possibility of increased scrutiny by regulators or plaintiff's 
attorneys as a negative outcome from the monitoring rule, the Bureau 
believes that the increased transparency will tend to increase 
consumers' ability to seek redress for legal violations, providers' 
incentives for compliance, and general public confidence in the orderly 
operation of the markets. While these impacts are likely to be modest 
compared to the class rule given that the number of consumer-filed 
individual arbitrations is so low, the Bureau still views them as 
supporting the adoption of the publication portion of the rule.
    While some commenters were concerned that the publication of 
arbitral records may permit plaintiff's attorneys to identify 
potentially classable claims or claims that could be brought in 
individual arbitrations or litigations, the Bureau does not find this 
is necessarily a frequent result of publication. As discussed in Part 
VI.B.3

[[Page 33318]]

above, class actions are more likely to serve as a vehicle for 
adjudicating small-dollar claims affecting large groups of consumers 
than are individual arbitrations. The Bureau also notes, as discussed 
above in Parts III and VI.B.3, that there are many differences between 
the few claims consumers bring in arbitration and those brought in 
class actions. To the extent that individual arbitrations do lead to 
class claims, however, the Bureau finds no evidence that such suits 
would necessarily be frivolous or meritless insofar as attorneys are 
prohibited by ethics and court rules from bringing such cases. For 
example, the Study identified several arbitrations in which consumers 
were awarded relief by the arbitrators and many more that may have 
settled on terms favorable to the consumers.\796\ Nor is there evidence 
that any significant number of arbitrations involve consumers 
succeeding on claims that are frivolous or meritless.
---------------------------------------------------------------------------

    \796\ See Study, supra note 3, section 5 at 32 (likely 
settlements); see also id. section 5 at 13 (arbitrators provided 
some kind of relief in favor of consumers' affirmative claims in 32 
disputes). 
---------------------------------------------------------------------------

    With regard to the industry commenter's concern that the 
publication requirement would subject providers to class actions 
concerning provider compliance with the monitoring rule itself, the 
Bureau will review records received from providers to ensure compliance 
with Sec.  1040.4(b)(3) before publishing them, and pursuant to new 
Sec.  1040.4(b)(5) the Bureau will further redact the records to reduce 
re-identification risk. The Bureau notes that, in any case, this rule 
does not permit private claims for non-compliance with Sec.  
1040.4(b)(3). The Bureau also believes that, given the low number of 
arbitrations identified by the Bureau in the Study, it is unlikely that 
any given provider would make enough redactions (let alone redaction 
mistakes) to face class liability. As to the concern that noncompliance 
of pre-dispute arbitration agreements with Sec.  1040.4(a)(2)(i) may 
result in class action liability, the Bureau notes that there is no 
private right of action for non-compliance when this rule does not give 
rise to a private right of action.
    With regard to the comment that providers would remove pre-dispute 
arbitration agreements from contracts with consumers because the 
publication of awards favoring consumers would increase provider 
exposure to litigation risk, the Bureau believes it unlikely that the 
publication requirement will cause providers to remove pre-dispute 
arbitration agreements above and beyond those that would do so because 
of the class rule. As explained further in the Section 1022(b)(2) 
Analysis, the odds that any one provider will be required to comply 
with the reporting and redaction requirements in a given year are quite 
low; out of the approximately 50,000 providers covered by the rule, the 
Bureau expects that each year less than 1,000 or so providers will be 
involved in arbitration proceedings or litigation motions relying on 
pre-dispute arbitration agreements such that they would be required to 
submit records to the Bureau. Moreover, the Study indicated that awards 
favoring consumers in individual arbitration are uncommon.\797\ Given 
these small odds and the modest burdens involved, the Bureau is 
skeptical that the monitoring rule would be the decisive factor in a 
provider's dropping of arbitration agreements. In any case, to the 
extent that any providers would drop their pre-dispute arbitration 
agreements due to the publication requirement, the Bureau concludes 
that the publication requirement is still in the public interest. In 
particular, the Bureau believes that transparency from the publication 
regime for those arbitrations subject to it will provide benefits 
described above that will more than offset the possible loss of access 
to arbitration under pre-dispute arbitration agreements that some 
consumers may experience if any providers chose to remove their 
arbitration agreements. In other words, the Bureau believes that the 
public interest favors a more transparent system, even at the potential 
cost of forgoing some non-transparent arbitration. Indeed, to the 
extent that consumers who would have brought claims in individual 
arbitrations must bring them in court instead, where litigation 
documents are made public by default, transparency would be advanced.
---------------------------------------------------------------------------

    \797\ Study supra note 3, section 5 at 13 (arbitrators reached 
decisions in less than one third of cases with affirmative consumer 
claims and awarded consumers relief in only about one- fifth of 
those).
---------------------------------------------------------------------------

    With regard to the commenter concerned that publication would make 
the work of State bank examiners more complicated, the Bureau disagrees 
that this is a reason not to publish arbitral records, as discussed 
above. In any event, for the reasons discussed above in connection with 
the class rule, the Bureau believes that investment in compliance 
activities is the best way to reduce class action risk; State bank 
examiners are well positioned to evaluate such compliance activities 
and encourage providers to take additional mitigation actions where 
warranted. The Bureau also believes that ease of forecasting class 
action risk does not outweigh the benefits to consumers and the public 
described above in connection with the monitoring rule, including the 
expressed interests of other State government commenters in using 
published arbitration data to protect consumers. As noted above, if 
there is additional class action litigation resulting from the 
publication of arbitral awards, the Bureau believes that such activity 
may benefit consumers and the public interest.
    With regard to the comment that suggested that the existence of the 
Bureau's consumer complaint database obviated the need for the 
publication of arbitral records, the Bureau disagrees that the 
complaint database serves the same function. As discussed above, the 
consumer complaints database lists complaints that typically occur 
prior to a consumer's engagement with a formal dispute mechanism such 
as arbitration. The Bureau's consumer complaint function exists to 
ensure that ``consumers can be heard by financial companies, get help 
with their own issues, and help others avoid similar ones.'' \798\ Any 
resolution of complaints through the service is informal and does not 
serve as precedent for future disputes or as guidance for like 
situations. By contrast, Bureau-published arbitration records may 
contain awards that could serve as useful guidance. And, as set out 
below in the Bureau's Section 1022(b)(2) Analysis, unlike the complaint 
database, the publication of arbitration records will make public 
binding decisions on the merits of a case by a third party that can 
serve as a means by which the public can better understand potential 
areas of non-compliance.
---------------------------------------------------------------------------

    \798\ Bureau of Consumer Fin. Prot., ``Consumer Complaint 
Database,'' http://www.consumerfinance.gov/data-research/consumer-complaints/ (last visited June 22, 2017) (``By submitting a 
complaint, consumers can be heard by financial companies, get help 
with their own issues, and help others avoid similar ones. Every 
complaint provides insight into problems that people are 
experiencing, helping us identify inappropriate practices and 
allowing us to stop them before they become major issues. The 
result: Better outcomes for consumers, and a better financial 
marketplace for everyone.'').
---------------------------------------------------------------------------

    With regard to the comment that important information derived from 
arbitration records should be pursued by the Bureau itself, not 
published for others to see and exploit, the Bureau disagrees because 
it has, as is set out in Part VI.B, limited enforcement and supervisory 
resources and does not have the ability or authority to pursue every 
potential violation of law. Other State and Federal regulators, or 
private attorneys, may be able to further

[[Page 33319]]

investigate and pursue trends that they discover in the arbitration 
records on the Bureau's Web site.\799\
---------------------------------------------------------------------------

    \799\ Transparency into arbitral claims and awards may aid other 
regulators and private attorneys identify consumer harms. Otherwise, 
consumer harms may be hidden from the public. For instance, as noted 
above, providers have filed motions to compel arbitration even in 
individual litigation in court. See Douglas v. Wells Fargo, BC521016 
(Ca. Super. Ct. 2013); Mokhtari v. Wells Fargo, BC530202, (CA. Super 
Ct. 2013).
---------------------------------------------------------------------------

    Privacy, redaction, and related issues. The Bureau finds that the 
potential costs and burdens on providers of the monitoring rule will be 
sufficiently low such that they are not a significant factor weighing 
against the rule being in the public interest. 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. As noted above, most providers will have no obligations 
under the monitoring proposal in any given year because most providers 
do not face even one consumer arbitration in a year and motions to 
compel arbitration in individual litigation are rare as the Study 
indicated.\800\ In any event, the burden of redacting and submitting 
materials for any given provider will be relatively low when they did 
have an arbitration. While a few commenters suggested the Bureau's 
estimates were too low, they neither offered alternative estimates nor 
identified items left out of the Bureau's estimates.
---------------------------------------------------------------------------

    \800\ Study supra note 3, section 6 at 54-61.
---------------------------------------------------------------------------

    With regard to the comment that the cost of complying with the rule 
would be low because providers would drop their arbitration agreements 
in response to the publication requirement, the Bureau disagrees that 
this is because the publication requirement will induce providers to 
drop their arbitration clauses. As set out above, the cost to providers 
is likely to be low because relatively few will face individual 
arbitrations and be required to submit documents to the Bureau. The 
Bureau believes that the publication requirement is unlikely to be a 
decisive factor in convincing providers to drop their clauses.
    The Bureau finds that the monitoring rule will minimize any adverse 
impact to consumer privacy. The key potential concern identified by 
commenters is that consumers may fear that, by engaging in arbitration, 
the Bureau's requirements may cause information about them to be 
divulged. The Bureau does not believe that these concerns will 
materialize because the final rules set out below require providers to 
redact information that identifies consumers, and also requires the 
Bureau to redact additional information (as well as any private 
information the providers may have inadvertently left unredacted) 
before publishing any records to further reduce the risk that consumers 
are identified.
    The Bureau acknowledges the concern expressed by commenters that 
even redacted information could be combined with publicly available 
information to re-identify specific consumers, but the Bureau believes 
that the redactions required of providers under Sec.  1040.4(b)(3) will 
substantially reduce the availability of personal and financial 
information. Further, to address these concerns, the Bureau is adopting 
Sec.  1040.4(b)(5), which was not in the proposal and which requires 
the Bureau to further redact other information to reduce even further 
any risk of re-identification before it publishes the materials.
    With regard to the comment that the publication proposal will 
result in the exposure of private consumer data without consumer 
consent, Sec.  1040.4(b)(3) requires the redaction of information 
identifying individual consumers, and new Sec.  1040.4(b)(5) requires 
the redaction of additional data that could be used to re-identify 
individuals. The Bureau also notes that no consumer or consumer 
advocates submitted comments that suggested that the monitoring 
proposal created a concern with the disclosure of private consumer 
data. As to the comment that consumers in debt collection cases may not 
wish to have their personal finances publicly disclosed, the Bureau 
reiterates its belief that the redactions it requires of providers, 
along with the additional redactions to be made by the Bureau, will 
sufficiently reduce re-identification risk.
    With regard to the comment that expressed skepticism about allowing 
government regulators to collect private data, the Bureau notes that 
the information it will receive from providers will generally be devoid 
of personal information to begin with, and the information the Bureau 
publishes will be redacted even further. While data breaches are a 
general concern for any public institution, the data that the Bureau 
will keep and publish will be redacted to reduce re-identification 
risk. The Bureau will also employ the same data security measures that 
it employs for other sensitive data that it currently maintains.
    With regard to the comments that suggested that the Bureau exclude 
credit unions from the Bureau's monitoring requirement because of the 
burdens it would impose on credit unions, the Bureau declines to do so 
for several reasons. Most importantly, the commenter did not point to 
any unique burden that a credit union would face in complying with the 
monitoring rule that would warrant an exemption for credit unions. In 
fact, as the Study showed,\801\ pre-dispute arbitration agreements are 
not common in credit union products. Further, the Bureau determined, as 
set forth below, to not adopt a blanket exemption from the rule for 
credit unions. Finally, while credit unions may be nonprofit, member-
owned entities that may have fewer incentives to engage in problematic 
practices with their members, it is not true that credit unions have 
never violated the law and have never faced cases in response to their 
past violations of the law.\802\ To the extent that credit unions enter 
pre-dispute arbitration agreements and engage in business practices 
that result in arbitration awards favoring consumers, the Bureau 
concludes that they should be subject to the monitoring and publication 
requirements.
---------------------------------------------------------------------------

    \801\ Study, supra note 3, section 2 at 14 (noting that of the 
sample of 49 credit unions surveyed, just four credit unions, 
representing 8.7 percent of insured deposits in that sample, used 
arbitration agreements in consumer contracts).
    \802\ See, e.g., Tina Orem, ``12 Credit Unions Face Overdraft 
Suits,'' Credit Union Times (Jan. 5, 2016), available at http://www.cutimes.com/2016/01/05/12-credit-unions-face-overdraft-suits.
---------------------------------------------------------------------------

    With regard to the concern that the loss of arbitral 
confidentiality would compromise the privacy of providers and their 
employees, the Bureau notes that Sec.  1040.4(b)(3) requires the 
redaction of personal information of all individuals, not just 
consumers. This would include providers' employees unless the provider 
is an individual. In addition, the Bureau will redact other information 
to comply with applicable privacy laws, if necessary.
    Confidentiality is not, as some commenters suggested, standard or 
custom in all arbitrations. As noted in the Study and by some 
commenters above, other arbitral administrators publish records by 
default, as set out above in the context of FINRA and AAA consumer 
arbitrations.\803\ The AAA, the largest administrator of consumer 
arbitrations, makes some consumer

[[Page 33320]]

arbitrations available to the public,\804\ and maintains consumer rules 
that permit it to publish consumer awards, thus putting providers on 
notice that their arbitration proceedings may become public.\805\ 
FINRA, the arbitration administrator and self-regulatory organization 
for the securities industry, has long published all arbitration-related 
documents without redactions. The Bureau finds that the trend among 
administrators is to expand public access to arbitration documents. The 
Bureau agrees with the commenters that argued that the public has an 
interest in accessing arbitral records and data, and the comments 
citing the experience of other arbitration administrators and State 
governments that publication does not deter or impede the use of 
arbitration as a dispute settlement mechanism.
---------------------------------------------------------------------------

    \803\ See Study, supra note 3, section 2 at 51-52 (``Arbitration 
rules typically do not impose express confidentiality or 
nondisclosure obligations on parties to the dispute, although 
arbitrator ethics rules do impose confidentiality obligations on the 
arbitrator. Most arbitration clauses in the sample were silent on 
confidentiality and did not impose any nondisclosure obligation on 
the parties.'').
    \804\ See AAA, ``Consumer Arbitration Statistics,'' https://adr.org/ConsumerArbitrationStatistics (last visited Jan. 27, 2017).
    \805\ AAA, Consumer Arbitration Rules,'' supra note 137, at 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, ``Case 
Docket,'' supra note 141.
---------------------------------------------------------------------------

    In any case, any expectation of confidentiality is lost to the 
extent parties to an arbitration file arbitration awards and other 
documents containing parties' names and other information with a court, 
such as in an effort to enforce an award. Finally, the Bureau finds the 
publication of arbitration records will likely not result in conflict 
with State laws on the confidentiality of arbitral records, given the 
experience of other nationwide administrators, such as FINRA, that 
publish arbitration records by default. To the extent that there is a 
conflict with State laws, the Bureau finds that publication would still 
be in the public interest.

VII. Section-by-Section Analysis

Section 1040.1 Authority and Purpose

    The Bureau proposed Sec.  1040.1 to set forth the authority for 
issuing the regulation and the regulation's purpose.
1(a) Authority
    Proposed Sec.  1040.1(a) provided that the rule is being issued 
pursuant to the authority granted to the Bureau by sections 1022(b)(1), 
1022(c), and 1028(b) of the Dodd-Frank Act. As the proposal noted, 
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. 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 of pre-
dispute arbitration agreements conducted under section 1028(a).
    For the reasons described in Part VI and below, the Bureau issues 
this final rule pursuant to its authority as described in Sec.  
1040.1(a), with findings that are consistent with the Study conducted 
under section 1028(a). The Bureau did not receive any comments on 
proposed Sec.  1040.1(a) and is finalizing this provision as proposed.
1(b) Purpose
    Proposed Sec.  1040.1(b) stated that the purpose of part 1040 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. This 
statement of purpose is consistent with Dodd-Frank section 1028(b), 
which authorizes the Bureau to 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. 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 
that the final rule is in the public interest and for the protection of 
consumers, and that its findings are consistent with the Study. The 
Bureau did not receive any comments on proposed Sec.  1040.1(b) and is 
finalizing this provision as proposed with one addition. Final Sec.  
1040.1(b) incorporates the Bureau's exercise of its authority in Dodd-
Frank section 1022(c), the purpose of which is monitoring for risks to 
consumers in the offering or provision of consumer financial products 
or services, including developments in markets for such products or 
services.

Section 1040.2 Definitions

    Proposed Sec.  1040.2 set forth definitions for certain terms 
relevant to the proposal. The Bureau received a number of comments on 
those proposed terms and their definitions, as well as suggestions to 
define additional concepts. The Bureau is finalizing Sec.  1040.2 with 
certain revisions from the proposal as discussed below.
2(a) Class Action
    The Bureau proposed to define the term class action because the 
substantive provisions of Sec.  1040.4(a)(1) concern class actions. 
Proposed Sec.  1040.2(a) would have defined the term class action as 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.
    Some consumer advocates and public-interest consumer lawyer 
commenters requested that the Bureau expand the definition of class 
action to include other types of mass actions that the commenters 
believed would have been excluded from the proposed definition. While 
the commenters suggested different approaches, they generally 
recommended that the definition be extended to cover two types of 
actions: (1) Actions in which one or more parties seek relief on a 
representative basis; and (2) actions in which there is more than one 
plaintiff but the plaintiffs do not seek relief on a representative 
basis (for example, mass joinder cases). One of the commenters, a 
public-interest consumer lawyer, suggested that the Bureau address this 
concern not by revising the definition of class action, but by adding a 
provision to proposed Sec.  1040.4 that would prohibit providers from 
moving to compel arbitration in a multiple-plaintiff action brought by 
a group of plaintiffs after they have been denied class certification. 
The commenters stated that some pre-dispute arbitration agreements 
expressly prohibit these types of mass actions separate from the 
prohibition on class actions. The commenters also noted that these 
types of mass actions resemble class actions in that they enable 
multiple consumers to obtain relief through a single lawsuit.
    After considering the comments, the Bureau is finalizing Sec.  
1040.2(a) as

[[Page 33321]]

proposed, with a technical edit to clarify that the definition of the 
term class action still applies even after class action status is 
obtained. When a court certifies a class action, class action status is 
no longer sought but instead, has been obtained. The Bureau declines to 
extend the definition of class action to cover additional types of mass 
actions. Although there may be similarities between class actions and 
the mass actions referenced in these comments, the Study did not 
analyze these types of actions, and the commenters did not provide any 
data or other evidence regarding the extent to which these types of 
actions enable consumers to enforce their rights under Federal and 
State consumer financial law. The Bureau also notes that it intends the 
phrase ``State process analogous to Rule 23'' to refer to any State 
process substantially similar to the various iterations of Federal Rule 
23 since its adoption; the State process in question need not precisely 
match Federal Rule 23. The Bureau further notes that the term class 
action refers to cases in which one or more parties seek class 
treatment regardless of when they seek class treatment; it is not 
intended to be limited to cases filed initially as class actions.
2(b) Consumer
    Section 1028(b) of the Dodd-Frank Act authorizes 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 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 have incorporated the 
Act's definition of consumer by stating that a consumer is an 
individual or an agent, trustee, or representative acting on behalf of 
an individual.
    An industry commenter stated the proposed definition of consumer is 
sufficiently clear, and a consumer advocate commenter requested that 
the Bureau finalize the definition of consumer as proposed. The 
consumer advocate commenter stated that the proposed definition was 
clear and easy to apply and that including agents, trustees, and 
representatives acting on behalf of individuals would ensure that the 
rule protects important groups of consumers. Another consumer advocate 
commenter expressed concern that companies contracting with one another 
could agree to relinquish a consumer's right to participate in a class 
action in a manner that binds the consumer even though the consumer was 
not a party to the contract. The commenter stated that the proposal 
acknowledged this issue by defining consumer to include an agent, 
trustee, or representative acting on behalf of an individual, and 
requested that the definition be amended by adding ``or otherwise 
purporting to obligate, or limit the rights of, an individual.''
    The Bureau is finalizing Sec.  1040.2(b) as proposed. Regarding the 
consumer advocate's concern that companies could contract with one 
another to relinquish a consumer's right to participate in a class 
action in a manner that binds the consumer, the Bureau believes that a 
company would only have the legal authority to relinquish the 
consumer's rights if it were an ``agent, trustee, or representative 
acting on behalf of'' the consumer, and thus the company would be 
covered by the definition as proposed. The commenter did not explain 
how such a relinquishment could happen otherwise. Accordingly, the 
Bureau declines to revise the definition of consumer in response to 
this concern. The Bureau believes that, to the extent that a consumer 
is party to an arbitration agreement and a provider seeks to assert 
that agreement in a class action involving a covered product, this rule 
would apply.
2(c) Pre-Dispute Arbitration Agreement
    Proposed Sec.  1040.2(d) would have defined the term pre-dispute 
arbitration agreement as an agreement between a provider and a consumer 
(as separately defined in proposed Sec.  1040.2(b) and Sec.  1040.2(c)) 
providing for arbitration of any future dispute between the 
parties.\806\ The Bureau derived its proposed definition from Dodd-
Frank section 1028(b), which, under certain conditions, authorizes the 
Bureau to regulate the use of agreements for consumer financial 
products or services that provide for arbitration of future disputes 
between covered persons and consumers. Proposed comment 2(d)-1 would 
have stated that the term 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, and provided illustrative 
examples of contract types.
---------------------------------------------------------------------------

    \806\ As noted below, for ease of reference, the Bureau has re-
numbered the definition of pre-dispute arbitration agreement in the 
final rule as Sec.  1040.2(c). The definition of provider, which was 
Sec.  1040.2(c) in the proposal, is Sec.  1040.2(d) in the final 
rule.
---------------------------------------------------------------------------

    Both a consumer advocate and a public-interest consumer lawyer 
commenter expressed concern about the phrase ``between a provider and a 
consumer'' in the proposal's definition of pre-dispute arbitration 
agreement. The commenters asserted that the phrase is confusing and 
could potentially limit the rule's application in ways the Bureau did 
not appear to intend, given that the Bureau stated elsewhere in the 
proposal that the provisions of proposed Sec.  1040.4 were intended to 
apply to pre-dispute arbitration agreements that were originally 
between consumers and entities other than providers. These commenters 
also stated that the phrase is redundant, because the substantive 
provisions in proposed Sec.  1040.4 would have applied only to 
providers; thus, in the commenters' view, it is unnecessary also to 
limit the scope of the term pre-dispute arbitration agreement to an 
agreement between a provider and a consumer. The consumer advocate 
commenter suggested that the Bureau remove the phrase ``between a 
provider and a consumer,'' while the public-interest consumer lawyer 
commenter requested that the Bureau replace the word ``provider'' with 
the phrase ``person'' as defined in Dodd-Frank section 1002(19).\807\
---------------------------------------------------------------------------

    \807\ Dodd-Frank section 1002(19) defines ``person'' as ``an 
individual, partnership, company, corporation, association 
(incorporated or unincorporated), trust, estate, cooperative 
organization, or other entity.''
---------------------------------------------------------------------------

    Additionally, the public-interest consumer lawyer commenter 
suggested that the Bureau amend proposed comment 2(d)-1 or add a new 
comment, to clarify that the presence or absence of opt-out provisions 
does not affect whether an agreement is a pre-dispute arbitration 
agreement under the rule. According to this commenter, providers 
sometimes argue that opt-out provisions make arbitration agreements 
fairer and that a consumer's failure to opt out indicates the 
consumer's assent to the arbitration agreement's terms. The commenter 
did not say, however, why it was necessary to clarify the definition of 
pre-dispute arbitration agreement on this point.
    Additionally, several commenters expressed concern that providers 
would seek to evade the rule if it was finalized as proposed by 
adopting a practice of amending their consumer agreements after a class 
action has been filed but before certification to state that any claims 
related to the dispute that is the subject of the class action must be 
resolved individually. These commenters were concerned that the 
definition of pre-dispute arbitration agreement in proposed Sec.  
1040.2(d) was limited to agreements providing for arbitration of any 
future dispute between the parties because they were

[[Page 33322]]

concerned that a dispute related to a pending class action could be 
construed as a ``current dispute'' between the consumer (who is 
presumably an absent class member) and the provider. One of the 
commenters, a public-interest consumer lawyer, predicted that providers 
might stop using pre-dispute arbitration agreements and instead adopt 
ad hoc agreements requiring arbitration of particular disputes that 
have given rise to class actions.\808\ Additionally, a consumer 
advocate commenter requested that the Bureau clarify that the 
definition of pre-dispute arbitration agreement includes delegation 
provisions, which are agreements to delegate to arbitration decisions 
regarding threshold issues concerning an arbitration agreement (such as 
enforceability).\809\
---------------------------------------------------------------------------

    \808\ This commenter also recommended that the Bureau revise 
Sec.  1040.4(a)(1) and (a)(2) to address this concern. However, for 
the reasons described below in its response to this comment, the 
Bureau does not believe that the revisions to either are necessary.
    \809\ The commenter also recommended that the Bureau revise 
Sec.  1040.4 to prohibit providers from relying on delegation 
provisions.
---------------------------------------------------------------------------

    After consideration of the comments, the Bureau is finalizing the 
definition of pre-dispute arbitration agreement with modifications as 
described below.\810\ Final Sec.  1040.2(c) defines pre-dispute 
arbitration agreement as an agreement between a covered person as 
defined by 12 U.S.C. 5481(6) and a consumer providing for arbitration 
of any future dispute concerning a consumer financial product or 
service covered by Sec.  1040.3(a). The final rule's definition of pre-
dispute arbitration agreement mirrors Dodd-Frank section 1028(b), which 
authorizes the Bureau, if certain conditions are met, to regulate ``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.''
---------------------------------------------------------------------------

    \810\ For ease of reference, the Bureau has re-numbered this 
definition in the final rule as Sec.  1040.2(c); the definition of 
provider, which was proposed Sec.  1040.2(c), is Sec.  1040.2(d) in 
this final rule.
---------------------------------------------------------------------------

    Final Sec.  1040.2(c) reflects two modifications from the proposal. 
First, the final rule's definition contains a new limitation: Pre-
dispute arbitration agreements must be agreements providing for 
arbitration of any future dispute ``concerning a consumer financial 
product or service covered by Sec.  1040.3(a).'' This limitation is 
already built into the operation of the rule because Sec.  1040.4 only 
applies to pre-dispute arbitration agreements concerning consumer 
financial products or services. Nonetheless, for clarity, the Bureau 
has added this limitation into the definition of pre-dispute 
arbitration agreement itself to reflect section 1028(b), which 
authorizes the Bureau to regulate agreements ``for a consumer financial 
product or service'' providing for arbitration of any future dispute 
between the parties.
    Second, the Bureau has replaced the phrase ``between a provider and 
a consumer'' with the phrase ``between a covered person as defined by 
12 U.S.C. 5481(6) and a consumer.'' The Bureau is persuaded that 
defining pre-dispute arbitration agreement as an agreement ``between a 
provider and a consumer,'' as in the proposal, is unnecessary and 
potentially confusing as to the intended scope of the rule. 
Specifically, as stated in the proposal, the Bureau had intended that 
the substantive provisions in proposed Sec.  1040.4 apply to providers 
as defined in proposed Sec.  1040.2(c) when they are relying on 
arbitration agreements in contracts for consumer financial products and 
services that were originally between consumers and persons who were 
excluded from the definition of provider in accordance with proposed 
Sec.  1040.3(b). The Bureau believes the phrase ``between a consumer 
and a covered person as defined by 12 U.S.C. 5481(6)'' addresses this 
concern and more closely reflects the Bureau's intention. The Bureau 
also notes that, while the term ``covered person'' is broader than the 
term ``provider,'' the final rule's use of the term ``covered person'' 
does not expand the universe of persons subject to the rule's 
requirements. That is because the rule's substantive requirements--the 
requirements imposed by Sec.  1040.4(a)(1), (a)(2), and (b), discussed 
below--apply only to ``providers.''
    New comment 2(c)-1 further clarifies this concept. Comment 2(c)-1.i 
explains that, while Sec.  1040.2(c) defines ``pre-dispute arbitration 
agreement'' as an agreement between a covered person and a consumer, 
the rule's substantive requirements, which are contained in Sec.  
1040.4, apply only to ``providers.'' Comment 2(c)-1.i notes further 
that, while ``covered persons,'' as that term is defined in Dodd-Frank 
section 1002(6), includes persons excluded from the Bureau's rulemaking 
authority under Dodd-Frank sections 1027 and 1029, the requirements 
contained in Sec.  1040.4 would not apply to any such persons entering 
into a pre-dispute arbitration agreement because they are not 
``providers,'' by virtue of Sec.  1040.2(d) (stating that persons 
excluded under Sec.  1040.3(b) are not providers) and Sec.  
1040.3(b)(6) (excluding any person to the extent not subject to the 
Bureau's rulemaking authority including under sections 1027 or 1029). 
The comment further clarifies that the requirements in Sec.  1040.4 
would apply, however, to the use of any such pre-dispute arbitration 
agreement by a different person that meets the definition of provider, 
when the pre-dispute arbitration agreement was entered into after the 
compliance date.
    New comment 2(c)-1.ii illustrates this concept with an example. 
Comment 2(c)-1.ii states that an automobile dealer that provides 
consumer credit is a covered person under Dodd-Frank section 1002(6)--
and such a person's contracts may contain pre-dispute arbitration 
agreements as that term is defined in Sec.  1040.2(c). Yet an 
automobile dealer that is excluded from the Bureau's rulemaking 
authority in circumstances described by Dodd-Frank section 1029 would 
not be required to comply with the requirements in Sec.  1040.4, 
because those requirements apply only to providers, and such automobile 
dealers, while they are covered persons, are excluded by Sec.  
1040.3(b)(6) and therefore are not providers under Sec.  1040.2(d). The 
requirements in Sec.  1040.4 would apply, however, to the use of the 
automobile dealer's pre-dispute arbitration agreement by a different 
person that meets the definition of provider, such as a servicer, or 
purchaser or acquirer of the automobile loan, where the agreement was 
entered into after the compliance date.
    To clarify the relationship between the definition of pre-dispute 
arbitration agreement and delegation provisions, the Bureau is adding 
comment 2(c)-2 to the final rule.\811\ Comment 2(c)-2 clarifies that 
the term pre-dispute arbitration agreement as defined in Sec.  
1040.2(c) includes delegation provisions, which the comment identifies 
as agreements to arbitrate threshold issues concerning the arbitration 
agreement, which may sometimes appear elsewhere in a contract 
containing or relating to the arbitration agreement.\812\ The Bureau 
believes that the definition of pre-dispute arbitration agreement in 
Sec.  1040.2(c) includes delegation provisions because such provisions 
are agreements between covered persons and consumers providing for 
arbitration

[[Page 33323]]

of any future dispute concerning a consumer financial product or 
service--namely, disputes over threshold issues concerning the 
arbitration agreement for such a consumer financial product or service. 
Accordingly, Sec.  1040.4(a)(1) prohibits a provider from relying on a 
delegation provision entered into after the compliance date with 
respect to any aspect of a class action that concerns a covered 
consumer financial product or service until such time as the case is 
determined not to be a class action. This interpretation is consistent 
with jurisprudence recognizing delegation provisions as arbitration 
agreements for purposes of the FAA.\813\
---------------------------------------------------------------------------

    \811\ As noted above, the commenter also recommended that the 
Bureau revise proposed Sec.  1040.4 to prohibit providers from 
relying on delegation provisions. New comment 2(c)-3 addresses how 
delegation provisions relate to the Bureau's rule.
    \812\ This comment is consistent with Rent-A-Center West, Inc. 
v. Jackson, 561 U.S. 63, 68 (2010) (stating that ``[t]he delegation 
provision is an agreement to arbitrate threshold issues concerning 
the arbitration agreement.'').
    \813\ See Jackson, 561 U.S. at 70 (``An agreement to arbitrate a 
gateway issue is simply an additional, antecedent agreement the 
party seeking arbitration asks the federal court to enforce, and the 
FAA operates on this additional arbitration agreement just as it 
does on any other.'').
---------------------------------------------------------------------------

    The Bureau intends this interpretation to apply even if the 
delegation provision is contained in a separate provision of the 
contract. In accordance with the Supreme Court's decision in Jackson, 
delegation provisions are themselves arbitration agreements that the 
Bureau has the authority to regulate under section 1028(b). That 
section 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.'' A delegation 
provision in a consumer contract for a consumer financial product or 
service is an ``agreement between a covered person and a consumer for a 
consumer financial product or service providing for arbitration of any 
future dispute'' pertaining to threshold issues concerning the 
arbitration agreement; thus, section 1028(b) authorizes the Bureau to 
prohibit or impose conditions or limitations on the use of such 
provisions.
    The Bureau believes it is not necessary to revise the definition of 
pre-dispute arbitration agreement to address the commenters' concern 
that providers will seek to evade the rule by amending consumer 
agreements after a class action has been filed (but before 
certification) to state that any claims related to the dispute that is 
the subject of the class action must be resolved individually. The 
Bureau believes that, under existing precedents, courts would not 
enforce such agreements. Courts have routinely held arbitration 
agreements adopted after a class action has been filed, but before 
certification, unenforceable as unconscionable or as improper 
communications with the class.\814\ Regarding the public-interest 
consumer lawyer's concern that providers would respond to the rule by 
abandoning pre-dispute arbitration agreements and adopting ad hoc 
agreements requiring arbitration of particular disputes that have given 
rise to class actions, the Bureau believes that, to the extent that 
providers adopt such agreements to bind putative class members, the 
precedents described above would apply. And to the extent that 
providers adopt such agreements to bind their consumers before a class 
action is filed against that provider, the Bureau believes that those 
types of agreements are plainly pre-dispute arbitration agreements 
under Sec.  1040.2(d), because they concern a future dispute.
---------------------------------------------------------------------------

    \814\ See, e.g., O'Connor v. Uber Techs., Inc., No. 13-3826, 
2013 WL 6407583, at *7 (N.D. Cal. Dec. 6, 2013) (defendant 
communicated improperly with class where it sought approval of 
arbitration agreement after class action was filed); Balasanyan v. 
Nordstrom, Inc., Nos. 11-2609, 10-2671, 2012 WL 760566, at *4 (S.D. 
Cal. Mar. 8, 2012) (denying employer's motion to compel arbitration 
based on arbitration agreement adopted by defendant after class 
action was filed on the ground that agreement was an improper 
communication with class); In re Currency Conversion Fee Antitrust 
Litig., 361 F. Supp. 2d 237, 250-254 (S.D.N.Y. 2005) (denying 
defendants' motion to stay litigation pending arbitration based on 
arbitration agreements adopted through change-in-terms notices that 
did not inform class members of lawsuit, on the ground that the 
agreements were improper communications with class); Carnegie v. H&R 
Block, Inc., 687 N.Y.S.2d 528, 533 (N.Y. Sup. Ct. 1999) (ordering 
that arbitration agreements in loan contracts entered into with 
consumers after filing of class action could not be enforced, on the 
basis that agreements were improper communications with putative 
class members); Powertel v. Bexley, 743 So. 2d 570, 577 (Fla. Dist. 
Ct. App. 1999) (affirming trial court's denial of motion to compel 
arbitration and ruling that arbitration agreements adopted through 
change-in-terms notice after filing of class action were 
unconscionable). Cf. Balasanyan v. Nordstrom, Inc., 294 FRD. 550, 
574 (S.D. Cal. 2013) (holding that where, after class action was 
filed, employer began requiring new employees to sign an arbitration 
agreement, new employees who signed that agreement may be excluded 
from class, because company was not communicating improperly with 
class members but ``engaging in standard practice that many 
companies engage in when hiring new employees'').
---------------------------------------------------------------------------

    Regarding the public-interest consumer lawyer commenter's concern 
about opt-out provisions, the Bureau does not believe that it is 
necessary to clarify that the presence or absence of an opt-out 
provision does not affect whether an agreement is a pre-dispute 
arbitration agreement within the meaning of Sec.  1040.2(c). The Bureau 
believes that it is clear that, where a pre-dispute arbitration 
agreement includes an opt-out provision, and the consumer has not opted 
out, there remains a governing pre-dispute arbitration agreement to 
which the Bureau's rule would apply.
    The Bureau did not receive comment on proposed comment 2(d)-1 and 
is finalizing the proposed comment, renumbered as comment 2(c)-3, as 
proposed.
2(d) Provider
    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 a ``covered person'' and a consumer. 
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 proposal, the Bureau used the term provider to refer 
to the entity to which the requirements in the proposal would have 
applied.\815\ Proposed Sec.  1040.2(c) would have defined the term 
provider as a subset of the term covered person. Specifically, proposed 
Sec.  1040.2(c) would have defined 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).
---------------------------------------------------------------------------

    \815\ For example, proposed Sec.  1040.4(a)(1) would have 
prohibited a provider from seeking to rely in any way on a pre-
dispute arbitration agreement entered into after the compliance date 
in a class action related to a covered consumer financial product or 
service.
---------------------------------------------------------------------------

    Proposed comment 2(c)-1 would have clarified 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 
must comply with this part only for the products or services that it 
offers or provides that would be covered by proposed Sec.  1040.3. The 
proposed comment would have illustrated this concept by noting that a 
merchant that transmits funds for its customers would be covered 
pursuant to proposed Sec.  1040.3(a)(7) with respect to the transmittal 
of funds, but the same

[[Page 33324]]

merchant generally would not be covered with respect to its sale of 
durable goods to consumers, except as provided in 12 U.S.C. 
5517(a)(2)(B)(ii) or (iii).\816\
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    \816\ As stated in the proposal, 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 proposal 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).
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    Other than a comment from an industry commenter, which stated that 
the proposed definition of provider was sufficiently clear, the Bureau 
received no comments on this proposed provision.\817\ The Bureau is 
finalizing the definition of provider largely as proposed, except for 
minor technical revisions.\818\ For ease of reference and as noted 
previously, the Bureau has also re-numbered this definition in the 
final rule as Sec.  1040.2(d); the definition of pre-dispute 
arbitration agreement, which was Sec.  1040.2(d) in the proposal, is 
Sec.  1040.2(c) in the final rule. Having not received any comment, the 
Bureau is also finalizing proposed comment 2(c)-1, renumbered as 
comment 2(d)-1, as proposed, with minor updates to align the comment 
with changes to Sec.  1040.3(a)(7) to which the comment refers and to 
clarify that the references to Dodd-Frank section 1027 refer to the 
activity of extending consumer credit. The Bureau is also adding 
comment 2(d)-2 to clarify that a person is a provider if it meets 
either prong of the definition of provider in Sec.  1040.2(d)(1) and 
(2). In particular, even if an affiliated service provider does not 
meet the definition of provider in Sec.  1040.2(d)(2), because it 
provides services to a person who is excluded from the rule under Sec.  
1040.3(b) and who thus is not a provider, the affiliated service 
provider still could be a provider as defined in Sec.  1040.2(d)(1). 
For example, if an affiliate of a merchant excluded by Sec.  
1040.3(b)(6) services consumer credit extended by the merchant, the 
affiliate servicer may meet the definition of provider in Sec.  
1040.2(d)(1) even though the merchant is not a provider. The comment 
also emphasizes that the rule applies to affiliated service providers 
in certain circumstances even when they are not themselves offering or 
providing a consumer financial product or service.
---------------------------------------------------------------------------

    \817\ A consumer advocate commenter also commented on this 
proposed definition. However, these comments related more directly 
to the rule's coverage mechanism. For this reason, the Bureau 
summarizes and responds to these comments in the section-by-section 
analysis for Sec.  1040.3, below.
    \818\ In the commentary to the definition of provider, the 
Bureau has corrected the cross-reference to transmitting funds 
coverage, which is in Sec.  1040.3(a)(7), and has clarified when 
that coverage would apply. The Bureau also has shortened the 
definition in Sec.  1040.2(d)(1) to refer to an ``activity'' covered 
by Sec.  1040.3(a), so that the terms governing which activities are 
covered appear in Sec.  1040.3(a). Finally, the Bureau has deleted 
the second usage of the phrase ``as defined in paragraph (c)(1)'' 
from the proposed definition, as only one usage of that phrase is 
needed.
---------------------------------------------------------------------------

    As stated in the proposal, the definition of the term ``person'' 
under section 1002(19) of the Dodd-Frank Act includes an individual, 
partnership, company, corporation, association (incorporated or 
unincorporated), trust, estate, cooperative organization, or other 
entity, and the term ``entity'' readily encompasses governments and 
government entities. Even if the term were ambiguous, the Bureau, based 
on its expertise and experience with respect to consumer financial 
markets, believes that interpreting the term to encompass governments 
and government entities would promote consumer protection, fair 
competition, and other objectives of the Dodd-Frank Act. Further, as 
stated in the proposal, the Bureau 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. In 
addition, 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. Accordingly, while the Bureau has chosen to exempt certain 
government entities under Sec.  1040.3(b)(2), the term provider is 
broad enough to encompass such entities to the extent that they are not 
otherwise excluded from the rule.\819\
---------------------------------------------------------------------------

    \819\ See supra section-by-section analysis of Sec.  
1040.3(b)(2).
---------------------------------------------------------------------------

Comments on Possible Additional Definitions
    Several commenters requested that the Bureau define additional 
terms relevant to this rulemaking that the Bureau did not propose to 
define.
    A public-interest consumer lawyer commenter and an industry 
commenter requested that the Bureau define the term ``arbitration.'' 
The public-interest consumer lawyer commenter suggested that the Bureau 
define ``arbitration'' as ``any binding alternative dispute resolution 
process'' and stated that this definition would provide clarity and 
limit evasion. The industry commenter did not recommend a specific 
definition of ``arbitration'' but stated that a definition would ensure 
compliance with the regulation.
    The Bureau declines to add a definition of ``arbitration'' to Sec.  
1040.2. While neither commenter stated why they believed a definition 
of arbitration would either prevent evasion or improve compliance, the 
Bureau believes that the relevant evasion concern would be that 
providers would create a binding alternative dispute resolution (ADR) 
process that is similar to arbitration but that uses a different name, 
and that such an arrangement could harm consumers were a court to 
conclude that it would not be covered by this rule. The Bureau believes 
that any such evasion attempts would fail. The Bureau is aware that 
there has been extensive litigation on the question of whether a 
particular ADR process is arbitration, in part because the FAA does not 
define the term. Most circuits apply a ``Federal common law'' standard 
that looks to whether disputants empowered a third party to render a 
final and binding decision settling their dispute.\820\ Two circuit 
courts apply the relevant State law, as long as that law does not 
frustrate the purposes of the FAA.\821\ The Bureau believes these 
precedents are broad enough to capture any ADR process that entities 
could implement in an effort to evade the rule, but the Bureau will 
nonetheless monitor the market for any attempts by providers to evade 
application of this rule in this manner.
---------------------------------------------------------------------------

    \820\ See, e.g., Bakoss v. Certain Underwriters at Lloyds of 
London Issuing Certificate No. 0510135, 707 F.3d 140 (2d Cir. 2013) 
(affirming district court's application of Federal common law 
standard that ``if the parties have agreed to submit a dispute for a 
decision by a third party, they have agreed to arbitration'').
    \821\ See Portland General Electric Co. v. U.S. Bank Trust Nat'l 
Ass'n, 218 F.3d 1085 (9th Cir. 2000) (applying Oregon law); Hartford 
Lloyd's Insurance Co. v. Teachworth, 898 F.2d 1058 (5th Cir. 1990) 
(applying Texas law).
---------------------------------------------------------------------------

    A consumer lawyer commenter requested that the Bureau add to Sec.  
1040.2 a definition of ``business of insurance'' that would cross-
reference the definition of ``business of insurance'' in Dodd-Frank 
section 1002(3).\822\ The commenter also

[[Page 33325]]

requested that the Bureau adopt commentary stating that certain 
contractual arrangements similar to guaranteed asset protection (GAP) 
waiver arrangements are not the ``business of insurance.'' \823\ The 
commenter stated that these revisions are needed because judges and 
litigants often deem such arrangements to be the business of insurance, 
when, in the commenter's view, they are not. If considered the business 
of insurance, such arrangements would be exempt from the rule under 
Dodd-Frank section 1027(m).\824\ If not, part 1040 could apply to pre-
dispute arbitration agreements in contracts for such arrangements where 
charges incurred by consumers pursuant to such arrangements are 
included in the cost of credit.\825\
---------------------------------------------------------------------------

    \822\ Dodd-Frank section 1002(3) states that the term business 
of insurance means the writing of insurance or the reinsuring of 
risks by an insurer, including all acts necessary to such writing or 
reinsuring and the activities relating to the writing of insurance 
or the reinsuring of risks conducted by persons who act as, or are, 
officers, directors, agents, or employees of insurers or who are 
other persons authorized to act on behalf of such persons.
    \823\ In a typical GAP waiver arrangement, a lender agrees, for 
an additional charge, to forgive some or all of any remaining debt 
following a covered loss. For example, where a waiver covers 
automobile theft, the lender would forgive the amount of any 
difference between the remaining balance on the consumer's 
automobile loan and the payout by the consumer's automobile 
insurance company following the theft of the consumer's automobile.
    \824\ Section 1027(m) explains that the Bureau may not define as 
a financial product or service, by regulation or otherwise, engaging 
in the business of insurance.
    \825\ See Sec.  1040.3(a).
---------------------------------------------------------------------------

    The Bureau declines to add to Sec.  1040.2 a definition of 
``business of insurance'' that cross-references the Dodd-Frank Act's 
definition of that term. The Bureau also declines to add commentary 
stating that contractual arrangements similar to GAP waiver agreements 
are not the business of insurance. The Bureau understands that a number 
of State courts and State banking regulators have determined that debt 
cancellation or suspension products such as those described by the 
commenter are not insurance.\826\ However, whether a particular debt 
cancellation arrangement involves the business of insurance may vary 
based on the particular facts and circumstances. The Bureau believes 
that whether a product involves the business of insurance is best 
ascertained by the provider's obtaining legal advice based on the facts 
in a particular case.\827\
---------------------------------------------------------------------------

    \826\ See, e.g., First Nat'l Bank of E. Arkansas v. Eubanks, 740 
F. Supp. 1427 (E.D. Ark. 1989) (holding that bank did not engage in 
the business of insurance when it entered into debt cancellation 
agreements); Automotive Funding Group, Inc. v. Garamendi, 7 Cal. 
Rptr. 3d 912 (Cal. Ct. App. 2003) (holding that an automobile 
lender's debt cancellation program was not insurance); 7 Tex. Admin. 
Code 12.33(b)(3) (Texas rule adopted in 2003 providing that State 
banks' debt cancellation and suspension agreements are governed by 
the Texas Administrative Code and applicable provisions in the 
Finance Code and not State insurance laws).
    \827\ See also the section-by-section analysis for Sec.  
1040.3(a)(1), below, which discusses additional comments the Bureau 
received concerning life insurance policy loans.
---------------------------------------------------------------------------

    An industry commenter requested that the Bureau define ``account'' 
and ``pre-dispute.'' The commenter did not recommend specific 
definitions for these terms but stated that they would help ensure 
compliance with the regulation. The Bureau believes it is unnecessary 
to define either of these terms. In the final rule, two provisions--
Sec.  1040.3(a)(5) and (a)(6)--use the term account. However, these 
provisions cross-reference TISA and EFTA respectively and their 
implementing regulations, both of which define the term.\828\ Thus, the 
Bureau believes it unnecessary to define those terms here. While Sec.  
1040.4(b)(3)(vi) uses the term ``account number,'' the Bureau does not 
believe that the commenter was indicating confusion over this term or 
that there is confusion about this concept. The Bureau believes it is 
unnecessary to define the term pre-dispute because the term is only 
relevant in the context of the term pre-dispute arbitration agreement, 
which Sec.  1040.2(c) already defines.
---------------------------------------------------------------------------

    \828\ See 12 CFR 1030.2(a) (defining ``account'' for purposes of 
Regulation DD); 12 CFR 707.2(a) (defining ``account'' for purposes 
of National Credit Union Administration's rule implementing TISA); 
12 CFR 1005.2(b)(1) (defining ``account'' for purposes of Regulation 
E).
---------------------------------------------------------------------------

Section 1040.3 Coverage and Exclusions From 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, the Bureau proposed Sec.  1040.3 to set forth the products 
and services to which proposed part 1040 would apply. Proposed Sec.  
1040.3(a) generally would have provided a list of products and services 
that would be covered by the proposal, while proposed Sec.  1040.3(b) 
would have provided limited exclusions.
    The Bureau proposed to cover a variety of consumer financial 
products and services that the Bureau believed 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. Lending money includes, for example: 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 
leases that are consumer financial products or services because they 
are similar to automobile loans. Storing money includes storing funds 
or other monetary value for consumers (such as providing deposit 
accounts). Moving money includes 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) described the products and services in 
these core consumer financial markets that the Bureau proposed to cover 
in part 1040. Each component is discussed separately below in the 
discussion of each subsection of Sec.  1040.3(a), along with a summary 
of comments received on each component, the Bureau's response to these 
comments, and any changes the Bureau is making to the subsection in the 
final rule.\829\ The Bureau notes that both banks and nonbanks may 
provide the products and services described in Sec.  1040.3(a). As 
discussed in the section-by-section analysis of ``provider'' (see Sec.  
1040.2(d) above), below in this section, and in the Bureau's Section 
1022(b)(2) Analysis, 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 is subject to the proposal, except 
to the extent an exclusion in proposed Sec.  1040.3(b) applies to that 
person. Proposed Sec.  1040.3(b) thus described exceptions to proposed 
Sec.  1040.3(a). Each proposed exception is discussed separately below, 
along with a summary of comments received related to each proposed 
exception, the Bureau's response to these comments, and any changes the 
Bureau is making to the subsection in the final rule.
---------------------------------------------------------------------------

    \829\ 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 Sec.  1040.3(b).
---------------------------------------------------------------------------

3(a) Covered Products and Services
The Bureau's Proposal
    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)).

[[Page 33326]]

However, as discussed in the section-by-section analysis of proposed 
Sec.  1040.3(b)(5), Dodd-Frank sections 1027 and 1029 \830\ 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.\831\
---------------------------------------------------------------------------

    \830\ 12 U.S.C. 5517 and 5519.
    \831\ However, as also discussed in greater detail in the 
section-by-section analysis of proposed Sec.  1040.3(b)(5) and 
clarified in comments 2(c)-1 and 2(c)-1.i to the final rule, 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 consumer financial product or service 
offered or provided by the entity excluded from the Bureau's 
rulemaking authority (such as the automobile loan referenced above).
---------------------------------------------------------------------------

    In exercising its authority under Dodd-Frank section 1028, the 
Bureau proposed to cover consumer financial products and services in 
what it described as the core markets of lending money, storing money, 
and moving or exchanging money. Accordingly, the Bureau did not propose 
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. As the proposal explained, Bureau intends to continue to 
monitor other markets for consumer financial products and services in 
order to determine over time whether to revisit the scope of this rule.
    In addition, the Bureau structured the proposed scope provisions to 
use a number of terms derived from existing, enumerated consumer 
financial protection statutes implemented by the Bureau in order to 
facilitate compliance. In so doing, the Bureau expected that the 
coverage of proposed part 1040 would have incorporated 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, 
the proposal noted that changes that the Bureau had proposed regarding 
the definition of an account with regard to prepaid products under 
Regulation E would have, if adopted, affected the scope of proposed 
Sec.  1040.3(a)(6).\832\
---------------------------------------------------------------------------

    \832\ The Bureau did adopt changes to that regulation in a final 
rule issued in October 2016 that, when it takes effect, will expand 
the types of products that are considered accounts and that would be 
subject to proposed Sec.  1040.3(a)(6), as is discussed below. See 
Prepaid Accounts Under the Electronic Fund Transfer Act (Regulation 
E) and the Truth in Lending Act (Regulation Z), 81 FR 83934 (Nov. 
22, 2016); 82 FR 18975 (Apr. 25, 2017) (setting effective date of 
April 1, 2018 for most provisions). See also Prepaid Accounts Under 
the Electronic Fund Transfer Act (Regulation E) and the Truth in 
Lending Act (Regulation Z), 82 FR 29630 (June 29, 2017) (proposal 
seeking comment on whether the effective date should be further 
delayed).
---------------------------------------------------------------------------

    To effectuate this approach, the Bureau specifically proposed in 
Sec.  1040.3(a) that proposed part 1040 generally would have applied 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 proposed 
comment 3(a)-1 would have explained, that statutory 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.
Comments Received
    A number of consumer advocates, nonprofits, consumer law firms, and 
industry commenters identified specific products or services that, in 
their view, should or should not be covered; these comments are 
addressed in relevant subsections of the section-by-section analysis 
below.\833\ Some industry commenters challenged areas of proposed 
coverage, on the basis that their industry was either not analyzed, or 
not sufficiently analyzed, in part or all of the Study. Those comments 
are discussed in the analysis of comments on the Study above in Part 
III.
---------------------------------------------------------------------------

    \833\ In addition, a consumer advocate also urged the Bureau to 
cover real estate brokerage and title insurance because arbitration 
agreements in those markets are, in their view, common and have the 
effect of suppressing claims. Having not sought notice and comment, 
the Bureau declines to add these markets to the rule.
---------------------------------------------------------------------------

    In addition, the Bureau received several comments more generally 
addressing its overall proposed approach to scope of coverage that 
focused on three core markets and its frequent reliance on already-
enumerated terms in Federal consumer financial laws. One consumer 
advocate agreed with the Bureau's proposed approach to delineating the 
scope of coverage, which, in its view, would reduce uncertainty and 
assist the Bureau and courts in administration of the rule. Three 
public-interest consumer lawyer commenters believed the proposed 
coverage was extensive. Nonetheless, a trade association of consumer 
lawyers, a consumer advocate, and an individual commenter stated in 
their comments that the scope of coverage should be broadened to reach 
all consumer financial products and services that may be regulated by 
the Bureau in the Dodd-Frank Act.\834\ These commenters generally 
believed that consumers of financial products and services do not 
knowingly and voluntarily enter into arbitration agreements, which 
often cover a broad range of claims, and as a result, arbitration 
agreements should be regulated wherever they occur in Bureau-regulated 
markets without limitation.
---------------------------------------------------------------------------

    \834\ This other consumer advocate also noted, however, that the 
rule should cover at least those products and services in the 
proposal because, in their view, consumers have been subjected to 
arbitration agreements in most, if not all, of those markets. Other 
consumer advocate comments similarly indicated that arbitration 
agreements were common in consumer finance markets.
---------------------------------------------------------------------------

    A public-interest consumer lawyer commenter supported the 
proposal's references to other laws and regulations to define scope, as 
this would ensure that the scope of coverage in the proposal would 
evolve as those laws and regulations are updated to address 
developments in the relevant markets. The commenter stated that this 
feature of the proposal would be particularly important for African 
American communities the commenter represents, which, in its view, are 
often a target for novel, and sometimes exploitative, consumer 
financial products and services. This commenter also suggested that for 
clarity the Bureau noted this feature in the official interpretations 
to part 1040. A consumer advocate commenter also supported the Bureau's 
proposed incorporation of definitions found in other regulations that 
may later be amended, noting the availability of notice-and-comment 
rulemaking for such amendments would allow commenters on those 
potential changes to address the relevance and application of part 
1040.\835\
---------------------------------------------------------------------------

    \835\ This commenter also stated in its comment that the rule 
should cover all types of mortgage settlement services, and not just 
mortgage brokering or mortgage lending. Having not sought notice and 
comment, the Bureau declines to add these markets to the rule.
---------------------------------------------------------------------------

    In addition, a consumer advocate and a public-interest consumer 
lawyer also expressed concern in their comments that persons who 
provide services to providers covered by the proposal (but who are not 
themselves providers) could escape the reach of the proposal. In 
particular, these commenters asserted that if a covered provider failed 
to comply with the proposal's requirement to insert a contract 
provision preventing

[[Page 33327]]

reliance on the arbitration agreement in a class action (proposed Sec.  
1040.4(a)(2)), then the service provider might attempt to rely on the 
arbitration agreement of the provider in a class action against the 
service provider because another provision of the rule, prohibiting 
invocation of an arbitration agreement in a class action (proposed 
Sec.  1040.4(a)(1)) would not apply.
The Final Rule
    The Bureau is finalizing the rule consistent with the overall 
approach it had set forth in the proposal to defining a broad but 
specific scope of coverage within the core markets of storing, lending, 
and moving money. The Bureau continues to believe that this approach 
will facilitate compliance with the rule and its administration. The 
Bureau recognizes, however, that the use of arbitration agreements for 
other consumer financial products or services not covered by the final 
rule nonetheless has a potential to cause harm to consumers. As stated 
in the proposal, the Bureau therefore plans to monitor the impact of 
arbitration agreements in these other markets. Based upon this 
monitoring, the Bureau may consider adjusting the scope of coverage of 
the rule in the future, whether by adjusting an existing category of 
coverage or by adding a new category of coverage, consistent with its 
rulemaking obligations and authority including Dodd-Frank section 1028.
    In addition, the Bureau believes that the references in the scope 
of coverage Sec.  1040.3 to existing laws and regulations is sufficient 
to signal that the coverage is determined based upon the content of 
those laws, as they exist now and as they may evolve in the future 
through amendments or new interpretations. Because this is how any 
regulation defining scope would function when it incorporates citations 
to existing laws, the Bureau does not believe it is necessary to adopt 
a specific comment to this effect, as one commenter suggested.
    With regard to the commenter that sought broader coverage of 
service providers, the Bureau does not believe a change is necessary to 
address this commenter's concern. To the extent a service provider is 
providing or offering a covered consumer financial product or service, 
then the class rule (Sec.  1040.4(a)(1)) prohibits that service 
provider from relying upon any arbitration agreement entered into after 
the compliance date, regardless of whether the service provider itself 
had entered into the agreement (see comment 4-2). For example, a debt 
collector collecting consumer credit on behalf of the creditor may be a 
service provider, but also would be covered directly (see Sec.  
1040.3(a)(10)(iii)). To the extent this commenter was, in effect, 
seeking an expansion in the proposed scope of coverage to reach persons 
who are not offering or providing a covered consumer financial product 
or service and are not an affiliated service provider to persons 
offering or providing a covered consumer financial product or service, 
the Bureau does not believe such an expansion in scope of coverage is 
warranted. Nevertheless, the Bureau shares the commenter's concern 
regarding a situation in which a person provides services to a provider 
that had failed to comply with this rule, and relies on the provider's 
non-compliant arbitration agreement. The Bureau believes that this 
problem can be addressed through means other than adding unaffiliated 
service providers to the coverage of this rule. For example, consumers 
may assert that the arbitration agreement in this example was invalid 
or unenforceable for its failure to comply with the Bureau's rule.\836\
---------------------------------------------------------------------------

    \836\ See, e.g., Cal. Civ. Code Sec.  1608 (providing that a 
contract is void if any component of consideration is unlawful), 
1667(1) (defining unlawful to include a contract that is ``contrary 
to an express provision of law'').
---------------------------------------------------------------------------

    The Bureau is also making minor technical revisions to the 
introductory paragraph of Sec.  1040.3(a). First, because the 
definition of pre-dispute arbitration agreement in Sec.  1040.2(c) 
already refers to agreements concerning the consumer financial products 
and services listed in Sec.  1040.3(a), it is not necessary to repeat 
the term ``pre-dispute arbitration agreement'' when describing the 
provisions relating to coverage and exclusions from coverage in Sec.  
1040.3(a). Second, the Bureau also is replacing the term ``generally 
applies'' from the proposal with the phrase ``except for persons when 
excluded from coverage pursuant to Sec.  1040.3(b).'' The Bureau is 
adopting this change to indicate that although a product or service may 
be listed in Sec.  1040.3(a), a person described in Sec.  1040.3(b) 
nonetheless will not be subject to the rule.\837\ Finally, the Bureau 
has added language to clarify that the rule applies to both the 
offering and provision of any product or service described in Sec.  
1040.3(a) when such offering or provision is a consumer financial 
product or service in the Dodd-Frank Act.\838\ Section 1040.3(a) 
describes some of the covered products and services using the term 
``providing.'' For example, Sec.  1040.3(a)(1)(i) covers an extension 
of consumer credit under Regulation B. Accordingly, the Bureau believes 
it is important to clarify that offering such a product also is covered 
by the rule.
---------------------------------------------------------------------------

    \837\ But see comment 2(c)-1 (clarifying that the rule applies 
to providers even when they are relying on pre-dispute arbitration 
agreements entered into by another person that is not subject to the 
rule).
    \838\ See 12 U.S.C. 5481(5) (defining the term consumer 
financial product or service to include a financial product or 
service that is ``offered or provided'' in specified circumstances).
---------------------------------------------------------------------------

    The Bureau is adopting comment 3(a)-1 to Sec.  1040.3(a) as 
proposed to explain the two general categories of consumer financial 
products or services defined in the Dodd-Frank Act. In addition, in 
response to comments described below in the section-by-section analysis 
of Sec.  1040.3(a)(3), the Bureau also is adopting comment 3(a)-2 
concerning the rule's coverage of mobile phone applications and online 
access tools for covered products.
3(a)(1)
    The Bureau believed that the proposal should apply to consumer 
credit and related activities including collecting on consumer credit. 
Specifically, proposed Sec.  1040.3(a)(1) would have included in the 
coverage of proposed part 1040 consumer lending under the ECOA, as 
implemented by Regulation B, 12 CFR part 1002, and various supplemental 
activities related to that lending, while the related activity of debt 
collection would have been covered by proposed Sec.  1040.3(a)(10).
    In particular, proposed Sec.  1040.3(a)(1) would have covered 
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) would have broken these 
covered consumer financial products or services into the following five 
types: (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 
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); (iii) 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); (iv) acquiring, purchasing, or 
selling an extension of consumer credit covered by proposed Sec.  
1040.3(a)(1)(i); or (v) servicing an extension of consumer

[[Page 33328]]

credit covered by proposed Sec.  1040.3(a)(1)(i). The Bureau describes 
and responds to the comments in categories (i) and (ii), (iii), and 
(iv) and (v), respectively, below.
3(a)(1)(i) and (ii)
The Bureau's Proposal
    Proposed Sec.  1040.3(a)(1)(i) would have covered providing any 
``extension of credit'' that is ``consumer credit'' as defined by 
Regulation B, 12 CFR 1002.2.\839\ In addition, proposed Sec.  
1040.3(a)(1)(ii) would have covered 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). This coverage 
proposed in Sec.  1040.3(a)(1) would have reached creditors whether 
they approve consumer credit transactions and extend credit, or 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.'' \840\ 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 expected that 
participants in the consumer credit market would have a significant 
body of experience and law to draw upon to understand how the proposal 
would have applied to them, which would have facilitated compliance 
with proposed part 1040.
---------------------------------------------------------------------------

    \839\ As is explained 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. 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). In addition, by proposing to cover only credit 
that is ``consumer credit'' under Regulation B, the Bureau was 
making clear that the proposal would not have applied to business 
loans.
    \840\ 12 CFR 1002.2(j). 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 the proposal, the Bureau had considered covering 
consumer credit under two statutory schemes: TILA and ECOA, as well as 
their implementing regulations. The Bureau believed, however, that 
using a single definition would have been simpler and thus it proposed 
to use the Regulation B definitions under ECOA because they are more 
inclusive. For example, unlike the TILA and its implementing regulation 
(Regulation Z, 12 CFR 1026.2(17)(i)), ECOA and Regulation B do not 
include an 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.
    The Bureau further noted in the proposal that in many 
circumstances, merchants, retailers, and other sellers of nonfinancial 
goods or services (hereinafter, merchants) may act as creditors under 
ECOA in extending credit to consumers. While such extensions of 
consumer credit would have been covered by proposed Sec.  1040.3(a)(1), 
exemptions proposed in Sec.  1040.3(b) would have excluded certain 
merchants from coverage.\841\ 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, as indicated in the 
proposal, proposed part 1040 generally would have applied to the 
merchant with respect to such transactions. For example, the Bureau 
believed merchant creditors significantly engaged in extending consumer 
credit with a finance charge often would have been ineligible for these 
exemptions.\842\
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    \841\ See 81 FR 32830, 32879-84 (May 24, 2016), and the 
discussion of Sec.  1040.3(b) below.
    \842\ As indicated in the proposal, certain automobile dealers 
would have been 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 would have been exempt under proposed Sec.  
1040.3(b)(5) in other circumstances, such as those specified in 
Dodd-Frank section 1027(a)(2)(D). A merchant that is a government or 
government affiliate also would have been exempt in circumstances 
described in proposed Sec.  1040.3(b)(2). Id. at 32873 n.449.
---------------------------------------------------------------------------

Comments Received
    The Bureau received a number of comments on in its proposed 
approach to covering extensions of consumer credit in proposed Sec.  
1040.3(a)(1). For the most part, these comments focused on coverage (or 
exclusion) of specific types of consumer credit and related activities.
    Two public-interest consumer lawyer commenters and a consumer 
advocate expressed support for the proposal's defining covered consumer 
credit based upon the coverage in Regulation B implementing ECOA, 
rather than what they viewed as a narrower universe of consumer credit 
transactions covered by Regulation Z implementing TILA. One of the 
public-interest consumer lawyers noted the ECOA-based coverage would be 
broader than TILA-based coverage, and importantly, in its view, reach 
persons with roles in the decision to approve or deny credit beyond 
only the person extending the credit. This commenter also stated that 
ECOA coverage would reach certain activities in relation to credit 
extended to consumers by merchants that are not subject to TILA. In the 
view of the consumer advocate, ECOA-based coverage is important because 
the alternative--TILA-based coverage--could incentivize companies to 
try to avoid coverage by reducing the number of installments or 
embedding a finance charge into the purchase price in order to render 
the credit not subject to TILA. A consumer lawyer also stated that, 
based on his experience counseling members of the armed forces, the 
proposal is important because it would extend its protections to 
products and services, such as loans secured by automobiles and other 
personal property, that are not reached by regulations implementing the 
MLA's restrictions on arbitration agreements. Finally, another public-
interest consumer lawyer stated that the proposed broad coverage of 
consumer credit, including short-term loans, is particularly important, 
as these products are used at higher rates by African Americans.
    Comments concerning mobile wireless third-party billing. A few 
comments focused specifically on a passage in the proposal's section-
by-section analysis in which the Bureau had noted that mobile wireless 
third-party billing could be subject to proposed Sec.  1040.3(a)(1)(i) 
to the extent that providers pass on charges to consumers for goods or 
services provided by third parties. Some comments specifically 
supported treatment of mobile wireless third-party billing as credit. 
For example, a consumer advocate commenter stated that the use of these 
platforms to impose charges for goods or services that consumers did 
not authorize (which often is called cramming) is a serious consumer 
protection problem and that arbitration agreements impede

[[Page 33329]]

consumers harmed by these practices from seeking relief. However, an 
industry trade association commenter asserted that mobile wireless 
providers when they provide such billing platforms do not extend 
consumer credit within the meaning of proposed Sec.  
1040.3(a)(1)(i).\843\ The commenter noted that extending credit entails 
the granting of a right to defer payment of a debt, and asserted that 
mobile wireless providers do not grant the consumer the right to defer 
payment for the nonfinancial goods or services of the third party in 
such situations. In this commenter's view, the right to defer payment 
for those goods or services is granted, if at all, only by the provider 
of those goods or services (i.e., the third party). As a result, in 
this commenter's view, the mobile wireless third-party billing product 
or service is merely a billing platform, and not itself a credit 
granting process that would cause it to be covered under this proposed 
subsection. This commenter urged the Bureau to reconsider its position 
that the proposed categories of coverage would reach mobile wireless 
third-party billing platforms.
---------------------------------------------------------------------------

    \843\ See also the section-by-section analysis of Sec.  
1040.3(a)(7) and (a)(8) below (discussing other issues raised by the 
industry trade association commenter, concerning uncertainty about 
the application of the rule to mobile wireless third-party billing 
and advocating for an exemption to ensure these products or services 
are not discontinued to the detriment of consumers Sec.  1).
---------------------------------------------------------------------------

    Comments concerning life insurance policy loans. An association of 
State insurance regulators, two insurance industry trade associations, 
a financial services industry trade association, and a consumer 
advocate specialized in insurance matters in their comments all took 
issue with the observation in the proposal's Section 1022(b)(2) 
Analysis that an impact on life insurance policy loans \844\ was 
unlikely but not entirely certain because whether life insurance policy 
loans would be covered by the proposal would depend on the facts and 
circumstances determination of whether they are the ``business of 
insurance'' under Dodd-Frank section 1002(15)(C)(i) and 1002(3).\845\
---------------------------------------------------------------------------

    \844\ The Bureau understands that a life insurance policy loan 
is generally a transaction in which the insurer of a life insurance 
policy that has an accumulated cash value provides money to the 
insured, and this amount is paid to the insurance company with 
interest either through payments made by the insured or as a 
deduction by the insurer from the cash value or payable benefits 
under the policy. See Nat'l Ass'n Ins. Comm'rs, ``Life Insurance 
Buyer's Guide,'' at 4 (2007) (describing loan features on insurance 
with a cash value), available at http://www.naic.org/documents/prod_serv_consumer_lig_lp.pdf.
    \845\ Comments on insurance matters focused almost exclusively 
on the potential coverage of life insurance policy loans. One 
industry trade association asked whether the proposal would cover 
insurance. Products that are the business of insurance are excluded 
from the Bureau's title X authority, and Sec.  1040.3(b)(6) 
incorporates that exclusion by reference. In addition, one consumer 
law firm stated in its comment that the proposed business of 
insurance exclusion should not apply to contractual commitments of 
automobile lenders to waive any loan amount in excess of the 
collateral value in the event of destruction or damage to the 
automobile. This comment cited an opinion from a State insurance 
regulator declining to regulate these debt cancellation or 
suspension products. The Bureau notes that the consumer law firm 
commenter did not identify in its comment any reasons why 
contractual commitments of automobile lenders might be the business 
of insurance, or why there was uncertainty over that question.
---------------------------------------------------------------------------

    The consumer advocate stated its support for coverage of any life 
insurance policy loans that are not the business of insurance. The 
industry trade association commenters asserted, however, that the 
Bureau unnecessarily created uncertainty for the insurance market by 
insinuating that there are loans administered by insurers that are not 
in business of insurance. These commenters requested that the Bureau 
confirm life insurance policy loans are categorically excluded from the 
rule because they are always the business of insurance, so that there 
is no uncertainty regarding the potential impact of the rule on them. 
In support of their arguments, they pointed to a number of ways in 
which, in their view, State law and State regulators treat policy loans 
as the business of insurance. These commenters emphasized that many 
States have adopted a model policy loan interest rate bill issued by 
the National Association of Insurance Commissioners (NAIC),\846\ and a 
number of States also specifically require that policy loan features be 
included in insurance contracts. They also noted that State insurance 
regulators typically review policy loan features of insurance contracts 
and that the NAIC has adopted accounting principles governing these 
transactions that are applied by insurance regulators.\847\ One 
commenter further urged that Regulation B should be construed as 
excluding policy loans just as they had been excluded from Regulation Z 
when there was no independent obligation to repay.\848\ This commenter 
cited to a prior statement of the Federal Reserve Board indicating that 
policy loans were not credit transactions because they were ``in 
effect, using the consumer's own money,'' i.e., the accrued cash 
value.\849\ Finally, one commenter asserted that State regulation of 
policy loans is sufficiently comprehensive that a Bureau assertion of 
authority over the product would violate the McCarran-Ferguson 
Act,\850\ a Federal law specifically directed at the regulation of 
insurance, which, in its view, prohibits Federal regulation of State-
regulated insurance products absent a specific authorization from 
Congress.\851\
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    \846\ Nat'l Ass'n Ins. Comm'rs, ``Model Policy Loan Interest 
Rate Bill, An Act to Regulate Interest Rates on Life Insurance 
Policies,'' Model Regulation Service (Apr. 2000), available at 
http://www.naic.org/store/free/MDL-590.pdf.
    \847\ Nat'l Ass'n Ins. Comm'rs, ``Statement of Statutory 
Accounting Principles,'' No. 49.
    \848\ This commenter cited to the exclusion of such a product 
from the definition of credit in Regulation Z. See 12 CFR 1026.2 
comment 2(a)(14)-1(v) (explaining that ``[b]orrowing against the 
accrued cash value of an insurance policy or a pension account, if 
there is no independent obligation to repay'' is excluded from 
Regulation Z's definition of credit). This commenter believed this 
exclusion also should apply to the definition of consumer credit 
under Regulation B, and thus that such loans would therefore not be 
covered by proposed Sec.  1040.3(a)(1).
    \849\ 46 FR 20848, 20851 (Apr. 7, 1981).
    \850\ 15 U.S.C. 1012(b).
    \851\ This commenter also noted that Dodd-Frank section 1027(m) 
prohibits the Bureau from ``defin[ing] as a financial product or 
service, by regulation or otherwise, engaging in the business of 
insurance.''
---------------------------------------------------------------------------

The Final Rule
    The Bureau is adopting Sec.  1040.3(a)(1)(i) and (a)(1)(ii) as 
proposed, with minor edits to more clearly signify how the coverage of 
these provisions is tied to established terms in Regulation B. For 
example, subparagraph (i) is revised to emphasize that it only applies 
to persons who are ``creditors'' under Regulation B. By proposing to 
cover extension of ``consumer credit,'' the proposal had already 
implicitly incorporated the term ``creditor,'' which is part of the 
definition of ``credit'' in Regulation B.\852\ Nonetheless, the Bureau 
believes the scope of subparagraph (i) is clearer if the regulation 
text explicitly states that it only applies to creditors as defined in 
Regulation B. The Bureau also notes that Regulation B defines the term 
``creditor'' as covering persons regularly engaging in the activities 
described in 12 CFR 1002.2(l) in the ordinary course of business. 
Because the term ``regularly'' is included in the definition of 
``creditor'' in Regulation B, that term will have the meaning given by 
Regulation B, and persons not regularly engaged in those activities in 
the ordinary course of business will not be covered by Sec.  
1040.3(a)(1)(i)-(ii). In addition, in subparagraphs (i) and (ii), the 
Bureau is placing terms that are derived directly from Regulation B in 
quotes to improve clarity. The Bureau

[[Page 33330]]

believes these revisions will provide greater certainty as to the scope 
of these subparagraphs.
---------------------------------------------------------------------------

    \852\ 12 CFR 1002.2(j) (defining ``credit'' as certain rights 
granted by a ``creditor''). See also 12 CFR 1002.2(h) (defining 
``consumer credit'' by incorporating the defined term ``credit'').
---------------------------------------------------------------------------

    As to the comments addressing whether mobile wireless third-party 
billing providers extend consumer credit, as noted above, because this 
rule borrows defined terms from an existing regulation, providers can 
look to interpretations of ECOA and Regulation B for the particular 
circumstances as they may arise. It is beyond the scope of this 
rulemaking to specify or describe the details of the circumstances that 
are covered by ECOA and Regulation B. Moreover, regardless of whether 
mobile wireless third-party billing providers are granting the consumer 
a right to defer payment, there are other potential bases for coverage, 
such as transmitting or exchanging funds under Sec.  1040.3(a)(7) or 
payment processing under Sec.  1040.3(a)(8). In addition, if the third 
party is the one granting the consumer a right to defer payment in 
circumstances described in Sec.  1040.3(a)(1)(i), and the mobile 
wireless provider is billing for and collecting those payments, these 
billing activities of the mobile wireless provider may involve the 
servicing of consumer credit covered by Sec.  1040.3(a)(1)(v).
    The Bureau also acknowledges the comments from the association of 
State insurance regulators and the industry trade associations that 
expressed concern over a statement in the Bureau's Section 1022(b)(2) 
Analysis in the proposal that did not rule out the possibility that the 
proposal could cover some life insurance policy loans. As the Bureau 
noted in its Section 1022(b)(2) Analysis in the proposal, however, the 
Bureau did not believe such coverage was likely.\853\ As the commenters 
recognized, and as stated in Sec.  1040.3(a) of the final rule, the 
final rule only covers products that are defined as consumer financial 
products and services under the Dodd-Frank Act, which, in its section 
1002(15)(C)(i), excludes the ``business of insurance.'' The Bureau is 
not interpreting the term business of insurance in this final rule, and 
observations in the Bureau's impacts analysis regarding a low 
likelihood of impact on life insurance policy loans should not be 
construed as a determination of coverage of any particular product or 
service. The Bureau recognizes that commenters have provided relevant 
information on how State insurance laws and State insurance regulators 
regulate or supervise aspects of this product. The Bureau therefore 
believes that the comments, taken as a whole, supported the estimate 
the Bureau had made in the Section 1022(b)(2) Analysis in the proposal, 
that any impact on this product is unlikely, whether because these 
loans would be determined to be the business of insurance, or for other 
reasons, such as laws precluding the use of arbitration 
agreements.\854\ The Bureau's Section 1022(b)(2) Analysis in this final 
rule therefore confirms this estimate. Contrary to the request of 
industry commenters, the Bureau does not believe it would be 
appropriate to delete that observation in the impacts analysis, as the 
observation does not reflect a determination of coverage. In any event, 
the Bureau confirms that when these products constitute the business of 
insurance, they are not subject to this rule, and thus the rule does 
not violate the McCarran-Ferguson Act.
---------------------------------------------------------------------------

    \853\ 81 FR 32830, 32917 (May 24, 2016) (indicating that life 
insurance policy loans were unlikely to be affected by the 
proposal). See also id. at 32933 appendix B (indicating that three 
cases against life insurance companies were excluded from the 
impacts analysis).
    \854\ With regard to the comment that the Bureau should in this 
rule construe the definition of credit in Regulation B similarly to 
Regulation Z, the Bureau was not proposing to interpret Regulation B 
in this rule and does not do so in the final rule.
---------------------------------------------------------------------------

3(a)(1)(iii)
The Bureau's Proposal
    Proposed Sec.  1040.3(a)(1)(iii) would have covered persons who, as 
their primary business activity, act as ``creditors'' as defined by 
Regulation B, 12 CFR 1002.2(l), by referring consumers to other ECOA 
creditors and/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.\855\ 
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 have applied to persons who are regularly 
engaging in these activities.\856\
---------------------------------------------------------------------------

    \855\ 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.''
    \856\ The Bureau also had 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, 81 FR 
32830, 32882-83 (May 24, 2016), and the discussion below on Sec.  
1040.3(b)(3) in the final rule.
---------------------------------------------------------------------------

    Because the Bureau did not generally propose to cover activities of 
merchants to facilitate payment for the merchants' own nonfinancial 
goods or services,\857\ proposed Sec.  1040.3(a)(1)(iii) would only 
have applied to persons providing these types of referral or selection 
services as their primary business.\858\ Thus, as proposed comment 
3(a)(1)(iii)-1 would have clarified, a merchant whose primary business 
activity consists of the sale of nonfinancial goods or services 
generally would not have fallen into this category. Proposed Sec.  
1040.3(a)(1)(iii) would not have applied, 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.\859\
---------------------------------------------------------------------------

    \857\ As noted above, however, the proposal would have applied 
to merchant creditors engaged significantly in extending consumer 
credit with a finance charge.
    \858\ Transmitting or payment processing in similar 
circumstances also generally would not have been covered by 
paragraphs (7) and (8) of proposed Sec.  1040.3(a), as discussed in 
the section-by-section analysis of those provisions in the proposal. 
81 FR 32830, 32876-77 (May 24, 2016). See also below.
    \859\ As the proposal noted, however, if the merchant regularly 
participates in a consumer credit decision as a creditor under 
Regulation B, the merchant would have been subject to the proposal 
under proposed Sec.  1040.3(a)(1)(ii) unless the merchant was 
subject to one of the exemptions in proposed Sec.  1040.4(b). 81 FR 
32830, 32874 n.454 (May 24, 2016).
---------------------------------------------------------------------------

Comments Received
    With regard to proposed Sec.  1040.3(a)(1)(iii)'s treatment of 
persons providing creditor referral or selection services as their 
primary business, several commenters, including consumer advocates, 
consumer law firms, public-interest consumer lawyers, and a nonprofit, 
stated that lead generators for consumer credit products should be 
explicitly covered because these persons can steer consumers to harmful 
consumer credit products. A consumer advocate added in its comment that 
it assumed that these lead generators would have been covered by the 
proposal based on the coverage in this provision of persons regularly 
engaged in consumer credit referrals or creditor selection as their 
primary business. This commenter stated that the final rule should 
include a clarification making this assumption explicit, otherwise, the 
commenter was concerned that lead generators that sell a list of leads 
to creditors may claim that the mere act of selling leads does not 
constitute ``referring'' or ``selecting'' a creditor to make an offer 
within the meaning of Regulation B.
    A consumer lawyer also stated that, based on his experience 
counseling members of the armed forces, the proposed coverage 
concerning consumer credit referrals is important because these 
activities are not reached

[[Page 33331]]

by regulations implementing the MLA's restrictions on arbitration 
agreements.
    Two consumer advocates and a public-interest consumer lawyer also 
urged the Bureau to remove the ``primary business'' limitation in 
proposed Sec.  1040.3(a)(1)(iii). One of the consumer advocate 
commenters asserted that this limitation was a loophole that would 
allow companies engaged in credit referrals or creditor selection to 
restructure their business to avoid coverage of the rule. The other 
consumer advocate commenter asserted that a company can have more than 
one primary business and thus the proposed exclusion was confusing. 
Finally, the public-interest consumer lawyer commenter stated that the 
rule should cover merchants providing credit referrals (including 
automobile dealers, medical providers and others) even when their 
primary business activity is the sale of nonfinancial goods or services 
to consumers.
The Final Rule
    The Bureau is finalizing proposed Sec.  1040.3(a)(1)(iii) and its 
associated commentary with certain technical edits \860\ and a change 
to the scope of this provision. In particular, final Sec.  
1040.3(a)(1)(iii)(C) excludes from the coverage of Sec.  
1040.3(a)(1)(iii) creditor referral or selection activity by a creditor 
that is incidental to a business activity that is not covered by Sec.  
1040.3(a).
---------------------------------------------------------------------------

    \860\ For clarity, the Bureau is adding the term ``consumer 
credit'' to clarify that is the type of credit referral and 
selection activity that triggers coverage, is moving the term 
``creditor'' to later in the provision and making associated edits, 
is placing defined terms in Regulation B in quotes for clarity, and 
is dividing the components of Sec.  1040.3(a)(1)(iii) into 
subparagraphs (A), (B) and (C).
---------------------------------------------------------------------------

    As explained in the proposal, the Bureau's goal in proposing a 
primary business limitation on Sec.  1040.3(a)(1)(iii) was to exclude 
from coverage merchants that are facilitating payment for their own 
nonfinancial goods or services in transactions with consumers through, 
for example, creditor referrals or selection activities.\861\ The 
Bureau specifically requested comment on its proposed approach to this 
issue. In light of the comments asserting that the term primary 
business may have an uncertain meaning in this context, the Bureau 
believes that using the term incidental would more clearly accomplish 
the goal stated in the proposal. In particular, the Bureau believes 
that the term incidental more clearly denotes the relationship between 
the creditor referral or selection activity and the underlying business 
activity that the Bureau is not seeking to cover in this rule.\862\
---------------------------------------------------------------------------

    \861\ 81 FR 32830, 32874 (May 24, 2016). The public-interest 
consumer lawyer commenter stated that the rule should cover merchant 
credit referrals such as those made by automobile dealers to a 
third-party financing company. The Bureau declines to cover such 
referrals and instead is maintaining the general goal of excluding 
merchant referrals.
    \862\ The Bureau also believes that covered persons may be more 
familiar with the term ``incidental,'' which is used in a separate 
but related context in Regulation B. See 12 CFR 1002.3(c)(1) 
(defining the term ``incidental credit'').
---------------------------------------------------------------------------

    The Bureau also is making conforming changes to comment 
3(a)(1)(iii)-1 and providing an example of incidental merchant referral 
or selection activity that would be excluded, even if performed 
regularly by a merchant who therefore may meet the definition of the 
term creditor in Regulation B.
    With regard to the commenters seeking coverage of consumer credit 
lead generators under proposed Sec.  1040.3(a)(1)(iii), the Bureau is 
not including an express reference to lead generation in the final 
rule. As noted above, the Bureau believes that basing consumer credit 
coverage on a longstanding regulation implementing an enumerated 
consumer protection law (i.e., Regulation B), including its provisions 
covering referral or creditor selection activity, facilitates 
compliance with this rule and reduces uncertainty over the scope of 
this rule. As a result, any person engaged in lead generation would be 
covered by the rule whenever their activities fall into one or more of 
the coverage categories in Sec.  1040.3(a), including Sec.  
1040.3(a)(1)(iii), which is linked to existing coverage in Regulation 
B. Whether a person is engaged in creditor referral or selection 
services within the meaning of Regulation B is a matter of application 
of that regulation based on the relevant facts and circumstances.\863\ 
The Bureau believes that extending the final rule beyond Regulation B 
to separately cover ``lead generation,'' a term that has no definition 
in existing law, could introduce the very uncertainty that the Bureau 
seeks to prevent by relying on Regulation B to define the scope of 
coverage. Having not sought notice and comment, the Bureau is not 
defining ``lead generation'' in this rulemaking.
---------------------------------------------------------------------------

    \863\ For example, some lead generators may take credit 
applications from consumers. See Fed. Trade Comm'n, ``Follow the 
Lead'' Workshop, Staff Perspective,'' at 4 (Sept. 2016), available 
at https://www.ftc.gov/system/files/documents/reports/staff-perspective-follow-lead/staff_perspective_follow_the_lead_workshop.pdf. See also section-by-
section analysis of Sec.  1040.3(a)(3) below (discussing comments on 
lead generators more broadly).
---------------------------------------------------------------------------

3(a)(1)(iv) and (v)
    Proposed Sec.  1040.3(a)(1)(iv) and (v) would have covered 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 have 
covered acquiring, purchasing, or selling an extension of consumer 
credit that would have been covered by proposed Sec.  1040.3(a)(1)(i). 
In addition, proposed Sec.  1040.3(a)(1)(v) would have covered 
servicing of an extension of consumer credit that would have been 
covered by proposed Sec.  1040.3(a)(1)(i). With regard to servicing, 
the Bureau did not propose a specific definition but noted in proposed 
comment 3(a)(1)(v)-1 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).
    The Bureau received one comment on its proposal to cover acquiring, 
purchasing, or selling an extension of consumer credit in proposed 
Sec.  1040.3(a)(1)(v). A consumer advocate expressed support for 
covering those who acquire credit extended by others. The commenter 
cited the example of indirect automobile finance companies that acquire 
loans from automobile dealers in circumstances where the Dodd-Frank Act 
excludes the dealer from the Bureau's rulemaking authority. The 
commenter stated that, in its view, acquirers and purchasers of 
consumer debts risk harming consumers if they fail to pass along 
information about the debt to debt collectors or subsequent purchasers.
    The Bureau received some comments concerning its proposal to cover 
the servicing of consumer credit in proposed Sec.  1040.3(a)(1)(v). A 
consumer advocate and a public-interest consumer lawyer expressed 
support for how this proposed coverage would reach third-party 
servicers of consumer credit extended by medical providers. In 
addition, many commenters addressed the Bureau's request for comment on 
whether the Bureau should add language explicitly covering furnishing 
information to consumer reporting agencies. These commenters, including 
consumer advocates, nonprofits, public-interest consumer lawyers, 
consumer law firms, and a research center urged the Bureau to add 
language explicitly covering furnishing information to consumer 
reporting agencies.\864\ Some

[[Page 33332]]

of these commenters urged that furnishing should be covered in 
particular when carried out in connection with the servicing of an 
extension of consumer credit. A consumer advocate urged the Bureau to 
cover certain types of electronic funds transfer activity, including 
those involving payments on loans.\865\ In contrast, an industry trade 
association commenter argued that furnishing is not part of servicing 
because servicing can occur without furnishing. This commenter asserted 
that if the Bureau were to cover furnishing by servicers, the burdens 
of the rule would create a disincentive to engage in furnishing, and 
the corresponding reduction in furnishing would be detrimental to the 
overall credit reporting system insofar as fewer instances of credit 
activity would be reported.
---------------------------------------------------------------------------

    \864\ These comments are discussed in more detail in the 
section-by-section analysis of Sec.  1040.3(a)(4) below.
    \865\ This comment is discussed in more detail in the section-
by-section analysis of Sec.  1040.3(a)(7) below.
---------------------------------------------------------------------------

    Another industry trade association stated in its comment that 
entities affiliated with merchants often engage in servicing of 
consumer credit extended by such merchants. In the view of this 
commenter, the rule's exclusions for merchants engaging in certain 
types of credit transactions (see proposed Sec.  1040.3(b)(4)-(5)) 
should also apply to affiliates of these merchants as well. This 
commenter explained its understanding that the decision to use an 
affiliate for servicing, rather than the merchant itself, is typically 
made for reasons, such as tax, cash flow, and other considerations, 
that have nothing to do with consumer access to remedies and do not 
affect consumers.
    The Bureau is adopting Sec.  1040.3(a)(1)(iv) and (v) as proposed. 
With regard to comments that requested that the Bureau separately cover 
furnishing of information on covered consumer credit accounts to a 
consumer reporting agency, the Bureau reiterates that it did not 
propose to identify furnishing separately as a covered product or 
service because it believes these activities are commonly carried out 
by servicers.\866\ With regard to comments that requested that the 
Bureau cover processing of funds transfers to make payments on consumer 
credit accounts, the Bureau similarly believes these activities also 
are commonly carried out by servicers. The Bureau therefore believes 
that when these activities are carried out by servicers in connection 
with servicing activity, they would be part of the servicing activity 
covered by Sec.  1040.3(a)(1)(v). The Bureau disagrees with the 
industry commenter's view that only activities that always occur in the 
course of servicing can be treated as part of servicing in this rule. 
This rule covers servicing regardless of whether a servicer engages in 
furnishing. When a servicer does furnish on a consumer credit account 
it services, that furnishing is part of the servicing.\867\ In any 
event, to the extent a servicer is furnishing, its furnishing 
activities must comply with FCRA, and the Bureau believes this coverage 
will promote increased compliance by better ensuring a remedy for any 
FCRA non-compliance. The Bureau also disagrees that considering 
furnishing to be a part of servicing for purposes of this rule would 
create a disincentive for servicers to engage in furnishing. The Bureau 
is not aware, for example, of any difference in the level of furnishing 
between servicers on accounts with arbitration agreements and servicers 
on accounts without arbitration agreements, nor did commenters provide 
any data suggesting such a difference.
---------------------------------------------------------------------------

    \866\ 81 FR 32830, 32874 (May 24, 2016).
    \867\ See, e.g., Defining Larger Participants of the Student 
Loan Servicing Market, 78 FR 73383, 73400 (Dec. 3, 2013) (noting 
that supervision of student loan servicing would examine servicing-
related activities, such as furnishing).
---------------------------------------------------------------------------

    With regard to the industry trade association that requested an 
exemption for merchant affiliates, the Bureau does not believe an 
exemption is warranted. Regardless of a firm's motivation for utilizing 
an affiliate for servicing of an extension of consumer credit (as 
opposed to having the originating creditor handle servicing in-house), 
that affiliate must comply with applicable laws in its servicing 
activities, and the Bureau believes that consumers should have an 
effective remedy for any violation of those laws. Any asymmetry in 
coverage between servicing by merchants and merchant affiliates is a 
function of the statutory exclusion for merchants pursuant to Dodd-
Frank section 1027(a)(2), and not a policy determination by the Bureau 
that the rule should never apply to consumer financial product or 
service activity related to merchants. The Bureau believes that 
merchant affiliates engaged in servicing should be covered for the same 
reasons that it believes servicing by unaffiliated servicers and 
servicing of any type of consumer credit should be covered.
3(a)(2)
    Proposed Sec.  1040.3(a)(2) would have extended coverage to 
brokering or extending consumer automobile leases as defined in 12 CFR 
1090.108, which applies to leases of automobiles with an initial term 
of at least 90 days and either of the following two characteristics: 
(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 automobile 
finance market.\868\ The Bureau believed that the proposal should reach 
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. The proposal noted that 
the Bureau had explained in that prior rulemaking that, from the 
perspective of the consumer, many automobile leases function similarly 
to financing for automobile purchase transactions (which generally 
would have been covered by proposed Sec.  1040.3(a)(1)) and have a 
similar impact on the consumer and his or her well-being.\869\
---------------------------------------------------------------------------

    \868\ 12 CFR 1001.2(a). As the proposal noted, in 2015 the 
Bureau finalized its larger participant rule for automobile 
financing. 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 
explains 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 . . . .'' 81 FR 32830, 32874 n.457 (May 24, 2016).
    \869\ As noted in the proposal, an automobile as defined in 12 
CFR 1090.108(a), 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. 81 FR 32830, 32874 n.456 (May 24, 2016).
---------------------------------------------------------------------------

    With regard to the proposed coverage of automobile financing, an 
industry trade association whose members participate in vehicle 
financing asked whether the rule would cover automobile club 
memberships.
    The Bureau also received a few comments from consumer advocates on 
proposed Sec.  1040.3(a)(2). One consumer advocate supported coverage 
of automobile financing including leasing contracts. The commenter 
cited several risks of harm that consumers face in this market and 
several examples that the commenter asserted illustrate the importance 
of class actions in this market.\870\ Two other consumer

[[Page 33333]]

advocates urged the Bureau to expand this proposed coverage beyond 
leases of automobiles to include leases for other types of property. 
They contended that insofar as the proposal would cover consumer credit 
financing a purchase of goods but not consumer leases of those same 
types of goods, the proposal could incentivize some creditors to 
restructure these transactions as leases, and thereby avoid coverage of 
the rule. One of these commenters asserted that there are many leases 
of personal property that are the functional equivalent of purchase 
finance arrangements within the reach of the Bureau's authority under 
Dodd-Frank section 1002(15)(A)(ii) and they should be covered by this 
rule. The commenter referred to ``rent-to-own'' leases of real estate 
(which it stated are often long-term contracts), recreational vehicles, 
furniture, electronics, alarm systems, and solar panels, and stated a 
belief that these transactions can create risk of harm to consumers.
---------------------------------------------------------------------------

    \870\ This commenter also suggested that automobile industry 
opposition to regulation of consumer arbitration agreements has not 
always existed. The commenter cited what it described as a statement 
from 2000 by a national automobile industry trade association (which 
did not file comments on this proposal). According to this 
commenter, the letter stated that the trade association ``does not 
support or encourage the use of mandatory binding arbitration in any 
contract of adhesion, whether a motor vehicle franchise contract 
between a manufacturer and dealer or a consumer contract.''
---------------------------------------------------------------------------

    The Bureau is adopting Sec.  1040.3(a)(2) as proposed. As discussed 
in the proposal, the Bureau has identified the market for automobile 
leases as a significant one to millions of consumers and concluded that 
it is part of the core consumer finance market for lending money that 
the Bureau proposed to cover in this rule. The Bureau did not propose 
to cover forms of consumer leasing other than automobile leasing. The 
Bureau notes that it is unclear from the comments urging expansion to 
other forms of leasing, which industry comments did not address, what 
the impact of expanding coverage to reach all forms of personal 
property leasing under Dodd-Frank section 1002(15)(A)(ii) would be. The 
Bureau also notes, with regard to concerns that lack of coverage under 
the rule would incentivize providers to restructure credit transactions 
as leases, that the rule's coverage of merchants extending credit is 
limited anyway \871\ and that a variety of other tax, accounting, 
insurance, and legal title or ownership considerations may affect 
structuring decisions. In any event, the Bureau can monitor 
developments in the provision of any consumer leases under Dodd-Frank 
section 1002(15)(A)(ii), and consider whether to amend this rule to 
reach those transactions at a future time.
---------------------------------------------------------------------------

    \871\ As the impacts analysis in the proposal noted, the Bureau 
believes that merchants rarely offer the type of credit financing 
that would subject them to the rule in the first place. 81 FR 32830, 
32917 (May 24, 2016).
---------------------------------------------------------------------------

    With regard to the question from an industry trade association 
concerning coverage of automobile club memberships, such memberships 
are not per se covered by the rule, as the Bureau believes that they 
would generally be nonfinancial goods or services. This does not 
necessarily mean, however, that the rule would never apply to claims 
concerning such products or services. For example, claims concerning 
the marketing of ``add-on'' products or services by lenders in 
connection with extending consumer credit could ``concern'' the loan, 
within the meaning of Sec.  1040.4(a) or (b), depending on the facts 
and circumstances of the claim.
3(a)(3)
The Bureau's Proposal
    As stated in the proposal, the Bureau believed that the proposal 
should cover debt relief services, such as services that offer to 
renegotiate, settle, or modify the terms of a consumer's debt.\872\ 
Proposed Sec.  1040.3(a)(3) would have included 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)(1)(i), or avoiding 
foreclosure. With the exception of the reference to an extension of 
consumer credit covered by proposed Sec.  1040.3(a)(1)(i), these terms 
would have derived directly from the definition of this consumer 
financial product or service in Dodd-Frank section 
1002(15)(A)(viii)(II).\873\ The Bureau noted that some consumer debts 
are not consumer credit, which the Bureau proposed to cover in proposed 
Sec.  1040.3(a)(1)(i). As a result, as explained in proposed comment 
3(a)(3)-1, proposed Sec.  1040.3(a)(3)(i) would have reached 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.
---------------------------------------------------------------------------

    \872\ 81 FR 32830, 32874-75 (May 24, 2016).
    \873\ 12 U.S.C. 5481(15)(A)(viii)(II). For examples of the types 
of services that would have fallen within this proposed coverage, 
the proposal (at 32875 n.458) identified the following Bureau 
enforcement actions: Complaint at ] 4, Consumer Fin. Prot. Bureau v. 
Meracord, LLC, No. 13-05871 (W.D. Wash. Oct. 3, 2013); Complaint at 
] 4, Consumer Fin. Prot. Bureau v. Global Client Solutions, No. 14-
06643 (C.D. Cal. Aug. 25, 2014); Complaint at ]] 8-14, Consumer Fin. 
Prot. Bureau v. Orion Processing, LLC, No. 15-23070 (S.D. Cal. Aug. 
17, 2015).
---------------------------------------------------------------------------

Comments Received
    Two public-interest consumer lawyer commenters expressed support 
for the proposal's coverage of debt relief services. These commenters 
pointed to consumer harms they believe these products have caused, and 
supported the proposal to cover debt relief not only for unsecured 
credit, but also for secured credit (including mortgage relief 
services) and non-credit debts. One commenter said this breadth of 
coverage would help to prevent circumvention but did not explain how.
    One public-interest consumer lawyer commenter urged the Bureau to 
cover general credit counseling in the rule. The commenter asserted 
that credit counselors can play an important role in consumers' 
decisions regarding consumer credit and are therefore a part of this 
core market. Another public-interest consumer lawyer commenter asserted 
that these credit counseling services often target low-income 
individuals. Neither commenter offered a suggestion for how the Bureau 
can define this market.
    Many commenters, including consumer advocates, nonprofits, public-
interest consumer lawyers, consumer law firms, and a research center 
advocated to expand the scope of coverage to reach a particular kind of 
credit counseling--credit repair services. These commenters asserted 
that many scams are perpetrated on consumers in the guise of credit 
repair services. Some of these commenters noted that some credit repair 
services include neither debt relief nor the provision of consumer 
reports to consumers and thus would not be covered by the proposal. In 
addition, an industry commenter described ongoing problems that third-
party credit repair companies were creating for consumer reporting 
agencies.
    Some commenters, including consumer advocates, nonprofits, consumer 
law firms, and others, also urged that the scope of coverage of the 
rule be expanded to include certain other services that the Bureau can 
regulate as financial advisory services pursuant to 12 U.S.C. 
5481(15)(A)(viii). These commenters referred to a wide range of 
services, including ``lead generation'' by providing information to 
facilitate the marketing of a variety of types of consumer financial 
products or services beyond consumer credit; and technological 
applications that collect personal financial information of consumers 
to facilitate delivery of advice on matters of consumer finance, 
whether budgeting, managing credit, or otherwise. Some of these 
commenters

[[Page 33334]]

noted that lead generators can steer consumers to harmful products or 
services, and that all of these products and services can expose 
consumers to data breaches. A consumer law firm commenter asserted that 
unless the Bureau's proposal specifically covered lead generators, they 
could enter into their own arbitration agreements with consumers and 
shield themselves from class actions, even when they were generating 
leads for a covered product or service.\874\
---------------------------------------------------------------------------

    \874\ This commenter noted an example of a lead generator that 
had done so, and sought to rely on its arbitration agreement in a 
class action filed against it for alleged harms arising from the 
product or service that was the subject of the leads generated. See 
Rodriguez v. Experian Services Corp. (9th Cir. 15-56660) (in which 
the commenter is co-counsel).
---------------------------------------------------------------------------

The Final Rule
    The final rule adopts proposed Sec.  1040.3(a)(3) as proposed, with 
an addition to cover providing products or services ``represented to 
remove derogatory information from, or improve, a person's credit 
history, credit record, or credit rating.'' The Bureau requested 
comment on the possibility of separately covering credit repair 
services and is making this change because it shares commenters' 
concerns over the potential for consumer harm in the credit repair 
market.\875\ In its experience and expertise, the Bureau believes 
credit repair services can have an important influence on consumers' 
participation in the core consumer credit market, and can create 
significant risks of harm to consumers when not provided in a legally 
compliant manner. Therefore, the Bureau believes that credit repair 
services are an appropriate form of credit counseling services to 
include in the scope of coverage in the final rule.
---------------------------------------------------------------------------

    \875\ See, e.g., Bureau of Consumer Fin. Prot., ``Consumer 
Advisory, ``How can I avoid a credit repair scam?,'' available at 
http://www.consumerfinance.gov/askcfpb/1343/how-can-i-recognize-credit-repair-scam.html (last visited Jun. 1, 2017); Complaint, 
Consumer Fin. Prot. Bureau v. Prime Marketing Holdings, No. 16-7111 
(C.D. Cal. Sept. 22, 2016) (enforcement action under the 
Telemarketing Sales Rule). See also section-by-section analysis of 
Sec.  1040.3(a)(4) (reciting numerous enforcement activities against 
credit repair organizations).
---------------------------------------------------------------------------

    The final rule's description of credit repair services is based on 
the description of credit repair services in the Telemarketing Sales 
Rule (TSR), which the Bureau, together with the FTC, enforces.\876\ 
Unlike the TSR, however, this coverage would not be limited to credit 
repair services offered only through telemarketing. The Bureau believes 
that credit repair providers often offer these services via online, 
radio, billboard, or television advertising platforms, which do not 
necessarily involve inbound or outbound telemarketing, and thus does 
not believe it necessary or appropriate to limit the coverage to 
telemarketing. Accordingly, for the sake of clarity, the Bureau is 
adding comment 3(a)(3)(ii)-1 to confirm that Sec.  1040.3(a)(3)(ii) 
includes in the coverage of this rule credit repair products or 
services not covered by the TSR solely because they were not the 
subject of telemarketing as defined in 16 CFR 310.2(gg). With regard to 
the commenters that urged an expansion of coverage to include lead 
generators, including for credit repair services, the Bureau notes that 
the case cited by a consumer advocate commenter actually alleged that 
the defendant company was itself providing credit repair services.\877\ 
The coverage in Sec.  1040.3(a)(4) would reach credit repair services. 
To the extent a person is not offering or providing a product or 
services described in Sec.  1040.3(a), however, the Bureau declines to 
cover them separately as a lead generator for the reasons discussed 
above in connection with Sec.  1040.3(a)(1)(iii).
---------------------------------------------------------------------------

    \876\ 16 CFR 310.4(a)(2); see, e.g., Complaint at ]] 60-80, 
Consumer Fin. Prot. Bureau v. Prime Marketing Holdings, No. 16-7111 
(C.D. Cal. Sept. 22, 2016).
    \877\ Complaint at Count III, Rodriguez v. Experian Cred. Svcs. 
Corp., No. 15-3553 (C.D. Cal. May 12, 2015).
---------------------------------------------------------------------------

    With regard to coverage of other types of services that commenters 
characterized as financial advisory services, the Bureau did not 
propose in this rulemaking to cover financial advisory services 
generally. At this time, the Bureau is not expanding the coverage of 
this rule to include these products or services. The Bureau will 
continue to monitor the use and impact of arbitration agreements in the 
provision of financial advisory services as part of its overall role in 
monitoring consumer finance markets. The Bureau also may determine at a 
future time that coverage of other forms of credit counseling would be 
warranted.
    The Bureau also recognizes that any number of consumer financial 
products or services it is not covering in this rule may involve the 
collection of the personal financial data of consumers, giving rise to 
a risk of a data breach and potentially identity theft. However, the 
Bureau in this rule is not seeking to cover providers merely based on 
their collection of consumer financial data. At the same time, the 
Bureau recognizes that the collection of such data in connection with a 
service or product covered by the rule is important to include within 
the scope of this rule. Accordingly, the Bureau is adopting comment 
3(a)-2 to clarify that when a person is a provider, the technological 
tools they provide in connection with the covered product, such as 
internet or mobile phone apps, also are covered. This comment applies 
to all of the covered products and services in Sec.  1040.3(a).
    For the reasons described in the proposal and reiterated above, the 
final rule adopts Sec.  1040.3(a)(3) and comment 3(a)-1 as proposed, 
renumbers them as Sec.  1040.3(a)(3)(i) and comment 3(a)(3)(i)-1, adds 
Sec.  1040.3(a)(3)(ii) and comment 3(a)(3)(ii)-1 to cover credit repair 
services, and adds comment 3(a)-2 as described above.
3(a)(4)
The Bureau's Proposal
    As explained in the proposal, the Bureau believed that the proposal 
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.\878\ Specifically, 
proposed Sec.  1040.3(a)(4) would have included 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 (1) through (3) or paragraphs (5) through (10) of 
proposed Sec.  1040.3(a).\879\
---------------------------------------------------------------------------

    \878\ 81 FR 32830, 32875-76 (May 24, 2016).
    \879\ As stated in the proposal, the Bureau believed 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. 81 FR 32830, 32875 n.462 (May 24, 
2016).
---------------------------------------------------------------------------

    As the proposal noted, the FCRA, enacted in 1970, defines which 
types of businesses are consumer reporting agencies.\880\ Consumer 
reporting agencies are the original sources of consumer reports as 
defined by the FCRA.\881\ 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 derived from the

[[Page 33335]]

reports to consumers.\882\ The consumer reporting agencies also provide 
consumer reports directly to consumers. The proposal stated that the 
Bureau believed 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, and thus facilitate compliance with part 1040 as 
proposed.\883\
---------------------------------------------------------------------------

    \880\ 15 U.S.C. 1681a(f).
    \881\ 15 U.S.C. 1681a(d).
    \882\ 15 U.S.C. 1681m.
    \883\ As the proposal noted, 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 proposal. 81 FR 32830, 32875 n.465 (May 24, 2016).
---------------------------------------------------------------------------

    Proposed Sec.  1040.3(a)(4) therefore would have applied 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 have 
covered not only credit monitoring services that monitor entries on a 
consumer's 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.\884\ 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; \885\ in connection with a risk-based 
pricing notice generally required under Regulation V, 12 CFR 1022.72; 
when a consumer receives materially less favorable 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.\886\
---------------------------------------------------------------------------

    \884\ See also Press Release, Bureau of Consumer Fin. Prot., 
``CFPB Orders TransUnion and Equifax to Pay for Deceiving Consumers 
in Marketing Credit Scores and Credit Products'' (Jan. 3, 2017), 
available at https://www.consumerfinance.gov/about-us/newsroom/cfpb-orders-transunion-and-equifax-pay-deceiving-consumers-marketing-credit-scores-and-credit-products/; Press Release, Bureau of 
Consumer Fin. Prot., ``CFPB Fines Experian $3 Million for Deceiving 
Consumers in Marketing Credit Scores'' (Mar. 23, 2017), available at 
https://www.consumerfinance.gov/about-us/newsroom/cfpb-fines-experian-3-million-deceiving-consumers-marketing-credit-scores/ 
(enforcement actions alleging deceptive practices in connection 
with, among other activities, providing credit scores to consumers).
    \885\ 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).
    \886\ 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 have covered 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 taken on an application for employment would not have 
been covered by proposed Sec.  1040.3(a)(4).
Comments Received
    One consumer advocate urged the Bureau to revise the proposed 
language to refer to the term ``consumer file disclosure'' from FCRA, 
and to cover products or services provided by affiliates of consumer 
reporting agencies to account for recent case law that might otherwise 
cause confusion or be construed to narrow the scope of coverage from 
what the proposal intended.
    A credit reporting industry commenter and a credit reporting 
industry trade association, with support from several Members of 
Congress and another industry trade association, urged the Bureau to 
structure the rule to avoid creating class action exposure under the 
CROA for credit monitoring or credit education products and services. 
CROA was enacted in 1996 for the purpose of ensuring that prospective 
buyers of services from credit repair organizations can make informed 
decisions and are protected from unfair or deceptive practices.\887\ 
CROA requires, for example, that credit repair organizations' products 
and services use certain disclosures; that any written contracts 
including a performance guarantee, an estimate of service completion or 
length, a cancellation right, and a three-day waiting period before 
these products and services can be provided; and that consumers only be 
charged after any service has been fully performed.\888\ In light of 
the potential for application of CROA, including its provision for 
disgorgement of all revenues as statutory damages,\889\ to credit 
monitoring and credit education products and services, these commenters 
urged that credit monitoring and credit education products and services 
be exempt entirely from the rule or at least from CROA claims. The 
credit reporting industry commenters asserted that if necessary, an 
exemption could be limited to consumer reporting agencies (CRAs) 
providing these products or services so as to distinguish them from the 
credit repair activities offered by businesses which are not affiliated 
with CRAs, which are the businesses these commenters believed Congress 
intended CROA to cover.\890\ The commenters challenged the Bureau's 
view in the proposal that the fact that the FTC administers CROA would 
be a basis for not excluding CROA claims involving credit monitoring 
from the rule. In their view, the fact that the Bureau does not 
administer CROA suggests that the Bureau should be reluctant to apply 
its rule to it.
---------------------------------------------------------------------------

    \887\ See 15 U.S.C. 1679(b).
    \888\ 15 U.S.C. 1679 et seq.
    \889\ 15 U.S.C. 1697g(a)(1) (providing for damages in the event 
of a CROA violation in an amount that is the greater of actual 
damages or any amount paid to the credit repair organization).
    \890\ These commenters also requested that an exemption also 
exclude identity theft products. As discussed below, however, the 
Bureau declines to cover those products per se, whether they are 
offered on their own or bundled with credit monitoring or credit 
repair products or services.
---------------------------------------------------------------------------

    In particular, two industry commenters asserted that the Bureau 
either failed to make findings that applying the rule to credit 
monitoring would be for the protection of consumers and in the public 
interest or improperly shifted the burden to industry to establish that 
applying the rule to credit monitoring does not meet those legal 
standards in Dodd-Frank section 1028. A nonprofit commenter also 
objected more broadly to the Bureau's preliminary view in the proposal 
that it would be more appropriate for issues such as these, which 
concern particular statutes with high statutory damages, to be dealt 
with by the Congress and the courts. The nonprofit stated that because 
the Bureau was exercising discretion to fashion the rule and determine 
how it should apply, that the Bureau would be the appropriate body to 
determine how to develop exemptions.
    These industry commenters asserted that CROA, which regulates 
contracts, disclosures, and other practices of credit repair 
organizations,\891\ does not apply

[[Page 33336]]

to credit monitoring and credit education services offered by CRAs 
because these services do not meet the definition of such services set 
forth in CROA.\892\ However, the commenters pointed to two Federal 
appellate court decisions that have held that CROA may apply to credit 
monitoring and credit education services respectively depending on the 
facts of the particular product and how it is marketed.\893\ They also 
emphasized that the FTC, which is the only agency charged with 
enforcing CROA, has never taken an action under CROA against credit 
monitoring services and has in the past indicated in communications to 
Congress that it would not be good consumer policy to apply CROA to 
these products or services.\894\ The commenters also explained that, 
given the industry's disagreement with the Federal appellate court 
decisions noted above, credit monitoring providers do not treat these 
products and services as subject to CROA, and instead arbitration 
agreements insulate them from exposure to class action suits. The 
commenters indicated that there has been no litigation since 2014 
involving the application of CROA to credit monitoring products.
---------------------------------------------------------------------------

    \891\ In particular, CROA proscribes certain practices and 
requires certain contractual provisions and disclosures for the 
purpose of ensuring that prospective buyers of services from credit 
repair organizations can make informed decisions and are protected 
from unfair or deceptive practices. See 15 U.S.C. 1679(b).
    \892\ To support their position, they cited to Hillis v. Equifax 
Consumer Servs. Inc., 237 FRD. 491 (N.D. Ga. 2006).
    \893\ See, e.g., Stout v. Freescore, LLC, 743 F.3d 680, 687 (9th 
Cir. 2014), citing Helms v. ConsumerInfo.com, Inc., 436 F.Supp.2d 
1220, 1224-26 (N.D. Ala. 2005); Zimmerman v. Puccio, 613 F.3d 60, 72 
(1st Cir. 2011) (``[C]redit counseling aimed at improving future 
creditworthy behavior is the quintessential credit repair 
service.''). Industry comments also described the Stout case as an 
example of a class action that drove a defendant out of business.
    \894\ Letter from Donald S. Clark, Sec'y, Fed. Trade Comm'n, to 
Hon. Hon. Edward R. Royce (July 1, 2005), attached to industry 
comment letter (same).
---------------------------------------------------------------------------

    These commenters further asserted that exposure to class action 
liability for CROA violations could prompt providers to stop offering 
credit monitoring services. This, the industry commenters believe, 
would deprive consumers of a product that is valuable and serves an 
important function of helping consumers prevent or mitigate the impact 
of identity theft, and could drive consumers to riskier products. They 
asserted that it would be infeasible for credit monitoring services to 
comply with several CROA provisions, the application of which they 
asserted also would be confusing or inconvenient for consumers. For 
example, the commenters asserted that mandatory disclosure language 
might be confusing to consumers because it refers to the credit repair 
organization dealing with consumer reporting agencies, and yet some 
credit monitoring providers are themselves consumer reporting 
agencies.\895\ The commenters also asserted that consumers would be 
inconvenienced by certain requirements regarding providing guarantees 
and obtaining consumer signatures,\896\ a prohibition on the provision 
of services before consumers pay or are charged,\897\ and a provision 
that the FTC and at least one court has interpreted as requiring a 
three-business-day waiting period before services are provided.\898\ 
These commenters also stated the threat of CROA exposure under the rule 
would inhibit innovation in credit education products, citing market 
research that, in their view, supports the contention that consumers 
are much less willing to subscribe to a product or service when faced 
with the CROA disclosures and waiting periods.
---------------------------------------------------------------------------

    \895\ 15 U.S.C. 1679c. In the commenter's view, the disclosure 
indicates that the credit repair organization is separate from the 
consumer reporting agency. Yet when consumer reporting agency 
affiliates are providing credit monitoring, they are not separate.
    \896\ 15 U.S.C. 1679d.
    \897\ 15 U.S.C. 1679b(b).
    \898\ United States v. Cornerstone Wealth Corp., Inc., 2006 WL 
522124 (N.D. Tex. 2006) (unpublished Federal district court opinion 
affirming FTC position that 15 U.S.C. 1679d requires both a three-
day waiting period and specified contract language). The consumer 
reporting agency commenter also stated that State laws concerning 
credit repair products may require longer waiter periods, such as 
five business days that are required under California and Florida 
laws. A consumer reporting trade association commenter noted that 
the California law includes disgorgement-based damages provisions 
(as do other credit services organization statutes in Texas and New 
York), but that the Florida law excludes consumer reporting 
agencies.
---------------------------------------------------------------------------

    The consumer reporting industry trade association also asserted 
that proposed Sec.  1040.3(a)(4) would create an un-level playing field 
in the market of identity theft prevention products and services. The 
commenter stated this would occur because some products or services 
monitor information from a consumer report as defined in FCRA, while 
others do not use such reports. In the view of this commenter, by 
basing coverage on whether the consumer report as defined in FCRA is a 
source of information, the proposal would disadvantage those identity 
monitoring products that rely upon that source of information. This 
commenter cited a particular concern with how identity monitoring 
products that do not rely on FCRA-defined information would be able to 
use arbitration agreements to prevent exposure to CROA liability.\899\
---------------------------------------------------------------------------

    \899\ The commenter did not explain how identity monitoring 
products that do not rely on FCRA-defined information could be 
subject to CROA, which applies to products with the purpose of 
``improving any consumer's credit record, credit history, or credit 
rating.'' 15 U.S.C. 1679a(3)(A)(i).
---------------------------------------------------------------------------

    Other commenters sought an expansion of this category of coverage. 
Specifically, several commenters, including consumer advocates and 
advocacy groups, a research center, two trade associations of consumer 
lawyers, and a small business advocacy group urged the Bureau to expand 
the coverage in proposed Sec.  1040.3(a)(4) to include identity 
monitoring services that monitor and provide consumers with information 
from sources other than consumer reporting agencies. One of these 
consumer advocates noted that identity monitoring services may monitor 
the internet for references to consumers' personal financial 
information, citing a service provided by a consumer reporting agency 
as an example. This commenter asserted that these services are related 
to the protection of the financial assets and financial reputation of 
the consumer, and may monitor financial or banking data of the 
consumer, bringing them within the authority of the Bureau to regulate.
    In response to the request for comment in the proposal on whether 
the scope of coverage should be expanded to include other activities of 
consumer reporting agencies, many commenters, including consumer 
advocates, nonprofits, a consumer law firm, and others, indicated that 
the Bureau should do so. Several of these comments expressed the view 
that consumer complaints concerning information in consumer credit 
files are very common, and collective remedies under FCRA are important 
to addressing inaccurate consumer credit reporting practices. An 
industry trade association stated in its comment, however, that 
arbitration agreements are not and could not be used in the context of 
consumer reporting agencies carrying out their statutory duties. 
Therefore, the commenter asserted that there is no support in the Study 
for this expansion of coverage and the Bureau lacks any rationale for 
considering it.
    A number of consumer advocates, nonprofits, and others also stated 
in their comments that the final rule should cover furnishing of 
information to consumer reporting agencies. These comments indicated 
that the coverage of furnishing should be broader than the proposal and 
not be limited to furnishing in connection with a

[[Page 33337]]

consumer credit transaction. One consumer advocate seeking this 
expansion noted that check collection, automobile leasing, and deposit 
accounts can lead to furnishing.
The Final Rule
    After consideration of the comments, the Bureau is adopting 
revisions to proposed Sec.  1040.3(a)(4) with minor wording 
modifications to clarify the intended scope of coverage by referring 
not only to the provision to consumers of ``consumer reports'' and 
``credit scores'' as defined in FCRA,\900\ but also to other 
information derived from a ``consumer file,'' as defined in FCRA. The 
Bureau also is making a minor modification to the exception for certain 
adverse action notices.\901\
---------------------------------------------------------------------------

    \900\ The Bureau is clarifying in the final rule that the term 
credit scores in Sec.  1030.3(a)(4) means credit scores as defined 
in FCRA. 15 U.S.C. 1681g(f)(2)(A).
    \901\ The proposed exception would only have applied to certain 
adverse action notices provided by a user covered by FCRA. 15 U.S.C. 
1681m. The term ``user'' is not defined in FCRA, however, and the 
Bureau did not intend for the exemption to turn on the identity of 
the person directly providing the notice to the consumer. By 
deleting the reference to this term, the exception applies 
regardless whether the notice is provided directly to the consumer 
by a user covered by 15 U.S.C. 1681m or a third party contracted by 
such a person. The Bureau also is shortening the description of the 
exception.
---------------------------------------------------------------------------

    As discussed above, in proposed Sec.  1040.3(a)(4) the Bureau 
sought to cover credit monitoring as well as services providing 
consumers with their credit reports or a credit score. These types of 
products and services all provide consumers with information that 
ultimately originates from a consumer reporting agency as defined in 
FCRA. In response to the comments suggesting that providing information 
to a consumer from a ``consumer file'' as defined in FCRA should be 
separately covered, in an abundance of caution, the Bureau is revising 
the terminology in the final rule to clarify this activity is covered 
by Sec.  1040.3(a)(4). The Bureau is clarifying that Sec.  1030.3(a)(4) 
covers providing information derived from a consumer's ``file,'' which 
FCRA, 15 U.S.C. 1681a(g), defines as ``all of the information on [the] 
consumer recorded and retained by a consumer reporting agency . . .''
    However, the Bureau is not adopting the consumer advocate 
commenter's suggestion of referring to a ``consumer file disclosure,'' 
as that is not a defined term in FCRA and relying on that term could 
raise doubt over the coverage of products or services whose information 
comes from a consumer's ``file'' but not as a result of the consumer 
file disclosure. Instead, the Bureau's revision to Sec.  1030.3(a)(4) 
reaches more broadly, to information ``derived from the consumer's 
file.'' \902\ For example, this would cover a person that obtains 
information from a third-party who obtained or derived the information 
from the consumer's file.\903\
---------------------------------------------------------------------------

    \902\ The phrase ``derived from'' is consistent with existing 
regulations implementing certain FCRA provisions. See 16 CFR 
682.1(b) (defining coverage of FTC rule on disposal of consumer 
report information and records by reference to information ``derived 
from'' such materials).
    \903\ The scope of this provision remains limited, however, by 
the focus on the source of the information being the consumer's file 
as defined in FCRA. A person that provides a consumer with 
information that also is kept in a consumer file would not be 
covered, unless the information provided actually came, directly or 
indirectly, from the consumer's file.
---------------------------------------------------------------------------

    The Bureau has carefully considered the comments relating to 
potential class liability for credit monitoring services under CROA, 
but does not agree that an exemption is warranted. In enacting CROA, 
Congress included a definition of the term credit repair organization 
in the statute.\904\ The Bureau is not taking a position on whether or 
when credit monitoring products or services provided by consumer 
reporting agencies are subject to CROA.\905\ However, based on its 
experience and expertise with respect to the credit repair market 
generally, the Bureau believes that if providers of credit monitoring 
products or services are subject to CROA because they are credit repair 
organizations, it is appropriate for this rule to apply to those 
products without an exemption.
---------------------------------------------------------------------------

    \904\ See 15 U.S.C. 1679a(3) (notwithstanding exclusions not 
relevant here, defining a ``credit repair organization'' as ``any 
person who uses any instrumentality of interstate commerce or the 
mails to sell, provide, or perform (or represent that such person 
can or will sell, provide, or perform) any service . . . for the 
express or implied purpose of--(i) improving any consumer's credit 
record, credit history, or credit rating; or (ii) providing advice 
or assistance to any consumer with regard to any activity or service 
described in clause (i)'').
    \905\ If they are not, then the exemption the commenters have 
requested would be unnecessary.
---------------------------------------------------------------------------

    At the outset, the Bureau notes that it disfavors exemptions to the 
class rule for claims under a particular statute. For the Bureau to 
decide a Congressionally-created private right of action does not 
protect consumers would amount to reconsideration by the Bureau of 
legislative policy choices. Further, the Bureau is concerned about 
taking actions that would be construed as allowing companies to avoid 
complying with applicable law. Indeed, such a result would be contrary 
to the goals of this rulemaking including deterring violations of the 
law and promoting the rule of law. And for the reasons discussed below, 
the Bureau does not believe commenters have presented persuasive 
evidence that compliance with or the remedial scheme established by the 
statute creating that private right of action is against the public 
good.\906\
---------------------------------------------------------------------------

    \906\ The Bureau disagrees with the industry commenters that the 
proposal shifted a burden to them or that the Bureau has otherwise 
neglected to make required findings in the rule in support of the 
coverage of credit monitoring products and services, including CROA 
claims to which they may be subject. As is discussed above in Part 
VI, the Bureau has made findings regarding the application of laws 
with private remedies to covered products and services and has found 
such application to be in the public interest and for the protection 
of consumers. These findings apply to CROA, which is one such law. 
The Bureau solicited comment on its preliminary findings in the 
proposal. The Bureau has carefully considered those comments, 
including comments raising concerns with the application of 
particular statutes in class actions. And for the reasons discussed 
herein, the Bureau disagrees that these findings are undermined with 
respect to providers of credit monitoring by the potential 
application of CROA to them. Comments regarding other particular 
statutes are discussed in Part VI. In addition, in the Bureau's 
Section 1022(b)(2) Analysis, the Bureau discusses the potential 
alternative raised by industry trade associations of excluding a 
broad set of statutes--those that provide for statutory damages or 
recovery of attorney's fees.
---------------------------------------------------------------------------

    With regard to CROA specifically, as the proposal indicated, the 
Bureau's Study covered class actions involving CROA and the Bureau has 
conducted pre-proposal outreach and research concerning CROA. The 
Bureau subsequently received a number of industry comments, which are 
discussed above. These inputs did not provide evidence that CROA, on 
the whole, fails to promote the public good and protection of 
consumers.
    In adopting CROA, Congress sought to protect consumers in the 
credit repair market as a whole, which it covered comprehensively, with 
limited exceptions.\907\ In the Bureau's experience and expertise, this 
market has been fraught with products that pose significant risks to 
consumers.\908\ In the more than two decades since the enactment of 
CROA, the agencies charged with enforcing the statute, the FTC and 
State law enforcement officials, have brought numerous CROA enforcement 
actions.\909\ The Bureau's

[[Page 33338]]

Study also identified six Federal class action settlements based on 
CROA claims finalized between 2008 and 2012.\910\ Indeed, as discussed 
above, the Bureau believes it is important that the final rule cover 
credit repair services, and it has added credit repair services based 
on coverage in the TSR to the coverage in Sec.  1040.3(a)(3)(ii).
---------------------------------------------------------------------------

    \907\ Congress excluded the following three entities from the 
definition of credit repair organization in CROA: Nonprofit 
organizations, creditors assisting with debts owed to them, and 
depository institutions and credit unions. 15 U.S.C. 1679a(3)(B). 
For the purposes of CROA, see Public Law 104-208, 2451 (1996) 
(adopting CROA, and making findings in the statute that the statute 
seeks to protect consumers from certain credit repair business 
practices that have ``worked a financial hardship upon consumers, 
particularly those of limited economic means and who are 
inexperienced in credit matters.'').
    \908\ Some of the most recent actions are described in the 
section-by-section analysis of the coverage of credit repair firms 
under Sec.  1040.3(a)(3)(ii) above.
    \909\ See, e.g., Press Release, Fed. Trade Comm'n, ``At FTC's 
Request, Court Shuts Down Credit Repair Scam that Impersonates 
FTC,'' (Mar. 27, 2015) (announcing CROA enforcement action), 
available at https://www.ftc.gov/news-events/press-releases/2015/03/ftcs-request-court-shuts-down-credit-repair-scam-impersonates-ftc; 
Press Release, Fed. Trade Comm'n, ``FTC Asks Court to Shut Down 
Phony Debt Relief and Credit Repair Scheme,'' (Aug. 22, 2014), 
available at https://www.ftc.gov/news-events/press-releases/2014/08/ftc-asks-court-shut-down-phony-debt-relief-credit-repair-scheme; 
Press Release, Fed. Trade Comm'n, ``FTC Charges Credit Repair 
Operators with Misleading Credit Bureaus and Charging Consumers 
Illegal Up-Front Fees,'' (Oct. 13, 2011) (same), available at 
https://www.ftc.gov/news-events/press-releases/2011/10/ftc-charges-credit-repair-operators-misleading-credit-bureaus; Press Release, 
Fed. Trade Comm'n, `` `Operation Clean Sweep': FTC and State 
Agencies Target 36 `Credit Repair' Operations,'' (Oct. 23, 2008) 
(announcement of Federal and State actions against 33 credit repair 
operations), available at https://www.ftc.gov/news-events/press-releases/2008/10/operation-clean-sweep-ftc-and-state-agencies-target-36-credit; Press Release, Fed. Trade Comm'n, ``Project Credit 
Despair Snares 20 Credit Repair Scammers,'' (Feb. 2, 2006) 
(announcement of Federal and State actions against 20 credit repair 
operations), available at https://www.ftc.gov/news-events/press-releases/2006/02/project-credit-despair-snares-20-credit-repair-scammers; Press Release, Fed. Trade Comm'n, ``List of Law 
Enforcement Actions: Operation New ID--Bad Idea,'' (Feb. 2, 1999) 
(announcement of more than 30 actions), available at https://www.ftc.gov/news-events/press-releases/1999/02/list-law-enforcement-actions.
    \910\ Study, supra note 3, section 8 at 13 fig. 1.
---------------------------------------------------------------------------

    Moreover, the Bureau notes that concerns about whether and when the 
statute applies to credit monitoring and (if so) whether the statute 
should be scaled back raise difficult policy and legal issues. 
Specifically, the Bureau notes that since 2005, there have been a 
number of efforts in Congress to determine whether CROA could be 
improved by clarifying the CROA credit monitoring coverage issue that 
commenters raised here.\911\ No consensus has been reached to date. In 
connection with these efforts, the FTC has twice expressed concern 
about the difficulty in structuring a revision to CROA that would 
distinguish between products that may pose significant risks to 
consumers and those that may not.\912\ This history suggests that the 
author of CROA (Congress) and its enforcer (the FTC) are not certain 
CROA should be revised, or how. Particularly given that an exception to 
the class rule would need to grapple with these same questions about 
distinguishing between different types of products, the Bureau is 
hesitant to decide them ahead of these primary actors.
---------------------------------------------------------------------------

    \911\ See H. Rept. 114-903 (2017) (describing hearing held Sept. 
27, 2016, as part of legislative history of including H.R. 347, 
Facilitating Access to Credit Act (Bill to exclude consumer 
reporting agencies from CROA and commission FTC study on whether 
other entities should be excluded, introduced Jan. 14, 2015)); 
Facilitating Access to Credit Act, H.R. 5446, 113th Cong. (2014) 
(Bill to exclude consumer reporting agencies from CROA and 
commission FTC study on whether other entities should be excluded, 
introduced Sept. 10, 2014); ``An Overview of the Credit Reporting 
System,'' Hearing on the Fair Credit Reporting Act before the 
Subcomm. on Fin. Insts., and Consumer Credit, H. Comm. on Fin. 
Servs., 113th Cong, (2014) (industry representative urging 
amendments to CROA concerning credit monitoring); ``Examining the 
Need for H.R. 2885, The Credit Monitoring Clarification Act,'' 
Hearing on H.R. 2885 before the H. Comm. on Fin. Servs., 110th Cong. 
(2008) (examining bill to amend CROA to provide a disclosure 
requirement and right to cancel for credit monitoring); Credit 
Monitoring Clarification Act, H.R. 6129, 109th Cong. (2006) (Bill to 
amend CROA to provide a disclosure requirement and right to cancel 
for credit monitoring, introduced Sept. 20, 2006); Credit Monitoring 
Enhancement Act, S. 3662, 109th Cong. (2006) (Bill to amend CROA to 
provide a disclosure requirement and right to cancel for credit 
monitoring, introduced July 14, 2006); Credit Repair Organizations 
Act Technical Corrections Act, H.R. 5445, 109th Cong. (2006) (Bill 
to amend CROA to provide a disclosure requirement and right to 
cancel for credit monitoring, introduced May 22, 2006); H.R. 4127, 
Financial Data Protection Act (Bill to amend CROA to provide a 
disclosure requirement and right to cancel for credit monitoring, 
introduced Oct. 25, 2005, and reported out by three House 
committees); Data Accountability and Trust Act, H.R. 3997, 109th 
Cong. (2005) (Bill to amend CROA to provide a disclosure requirement 
and right to cancel for credit monitoring, introduced Oct. 6, 2005, 
reported by three House committees as described in H. Rept. 109-
454).
    \912\ See ``Oversight of Telemarketing Practices and the Credit 
Repair Organizations Act,'' Hearing before the S. Comm. on Commerce, 
Sci., and Transp., 110th Cong. (2007) (testimony by FTC Bureau of 
Consumer Protection Director citing prior proposals to amend CROA 
and concern that fraudulent credit repair firms could use exemptions 
to evade CROA, and urging further Congressional review); Letter from 
Donald S. Clark, Sec'y, Fed. Trade Comm'n, to Hon. Edward R. Royce 
(July 1, 2005), attached to industry comment letter (same).
---------------------------------------------------------------------------

    With regard to the industry commenters' claims that compliance with 
CROA is infeasible or would result in substantial price increases, the 
Bureau is not persuaded of these claims based on the record before 
it.\913\ Even if CROA's disclosure requirements apply, the Bureau 
believes that they could be bundled with a contract and/or provided 
electronically.\914\ And if CROA bars collecting payment until the end 
of a service period, such as a monthly subscription period, it is 
unclear why providers could not make such a price structure work. 
Indeed, the Bureau notes that all three major consumer reporting 
agencies already forgo some or all revenues during an introductory 
period by offering credit monitoring at a discounted or even free price 
during that time.\915\ The commenters also did not demonstrate the 
infeasibility of complying with other CROA requirements.\916\ Thus, the 
Bureau does not find that the record supports a conclusion that these 
products or services cannot comply with CROA (if they are, in fact, 
subject to CROA). As to potential price increases, the Bureau believes 
that competition in this product market, including from depository 
institutions, which are exempt from CROA under 15 U.S.C. 
1679a(3)(B)(iii), might be a limiting factor.\917\
---------------------------------------------------------------------------

    \913\ With respect to the industry commenter's assertion that 
the Stout decision shows that CROA would drive credit monitoring 
providers out of business, the Bureau disagrees with this claim. To 
the extent credit monitoring is subject to CROA, credit monitoring 
firms could prevent substantial CROA class exposure by complying 
with CROA. The Stout decision does not reflect efforts by the 
defendant to comply with CROA.
    \914\ See 15 U.S.C. 1679c(a) (requiring only that written 
disclosure be provided ``before'' execution of the contract); 
Electronic Signatures in Global and National Commerce (ESIGN) Act, 
15 U.S.C. 7001(c) (proscribing standards permitting electronic 
delivery of disclosures that are required to be provided in 
writing). This sort of disclosure is among the least costly types of 
mandated disclosures. See generally Bureau of Consumer Fin. Prot., 
``Understanding the Effects of Certain Deposit Regulations on 
Financial Institutions' Operations,'' at 98 (2013), available at 
http://files.consumerfinance.gov/f/201311_cfpb_report_findings-relative-costs.pdf.
    \915\ See, e.g., Equifax, ``Get your Equifax 3-Bureau Credit 
Scores with your Free 7-day Trial,'' http://www.equifax.com/freetrial/ (last visited May 23, 2017) (offering free 7-day trial 
then $19.95 per month); Experian, ``Credit Monitoring, Try Experian 
CreditWorks for $4.99/first month,'' available at http://www.experian.com/consumer-products/credit-monitoring.html (last 
visited May 23, 2017) (offering $4.99 price for the first month and 
$24.99 for each month thereafter); TransUnion, ``Get all 3 bureau 
scores for FREE, Begin monitoring your credit reports when you start 
a 30 day trial for $4.95,'' https://www.transunion.com/ppc-credit-report-495 (last visited May 23, 2017) (offering 30-day trial for 
$4.95). See also, e.g., Ducharme v. Heath, 2010 WL 5211502 at *6 
(N.D. Cal.) (Slip Op. of Dec. 16, 2010) (holding that CROA does not 
prohibit billing on a monthly basis for a service performed during 
the prior month).
    \916\ Specifically, in particular, the commenters also have not 
demonstrated that it would be infeasible to provide a guarantee of 
performance (based on whatever service is being offered), to provide 
an estimate of the period necessary for performing services (such as 
a subscription period), or to obtain a signature of a consumer 
(which may be obtained electronically).
    \917\ The Bureau also understands that the credit monitoring 
market includes dozens of competitors and that competition may 
reduce the degree to which CROA compliance costs would be passed 
through to consumers. WalletHub, ``2017's Best Credit Monitoring 
Service,'' https://wallethub.com/best-credit-monitoring-service/ 
(last visited May 23, 2017) (An industry Web site that lists nearly 
30 providers.). See also Gov't Accountability Office, ``Identity 
Theft Services: Services Offer Some Benefits but are Limited in 
Preventing Fraud,'' at 5 (Mar. 2017) (Report to Congressional 
Requesters), available at http://www.gao.gov/assets/690/683842.pdf 
(finding about 50 to 60 companies providing identity theft services 
in 2015 and 2016).
---------------------------------------------------------------------------

    Commenters also contended that application of CROA to credit 
monitoring products could potentially

[[Page 33339]]

inconvenience consumers and confuse them. The Bureau has not seen 
support for commenters' concern about the potential for consumer 
confusion, which is based on disclosures referring to the credit 
monitoring provider and consumer reporting agency as separate persons. 
These disclosures would appear to remain accurate in the credit 
monitoring context, since the Bureau understands that credit monitoring 
providers are not the same entities as consumer reporting agencies. In 
addition, to the extent CROA might alter how credit monitoring is 
offered and that this may inconvenience consumers, the Bureau notes 
that consumers have other options in lieu of or in addition to credit 
monitoring products if such inconvenience would in fact be significant. 
With respect to credit monitoring itself, a brief cancellation period 
of a few days before commencing the product or service under CROA would 
not necessarily lead to many cancellations. The commenters did not 
contend that consumers were likely to cancel the product or service in 
this time period, and to the extent any consumers voluntarily choose 
not to use a product or service, this does not mean that the product or 
service is not accessible to them. Consumers also have a number of 
potential alternatives to credit monitoring. For example, consumers may 
place a freeze on the release of information from their consumer files 
in the first place \918\ or place a fraud alert on their consumer 
report in order to obtain alerts from potential creditors of potential 
new accounts before they are actually opened,\919\ and they may obtain 
free copies of their consumer report each year and in a number of other 
circumstances described in FCRA.\920\ In addition, depository 
institutions issuing credit cards have become a common provider of free 
credit scores to consumers.\921\ Additionally, the Bureau notes, as 
confirmed by the industry commenters, that a variety of identity theft 
prevention and remediation products or services may be bundled with 
credit monitoring, such as identity monitoring from non-FCRA sources, 
identity restoration services, and identity theft insurance. These 
products and services would not be covered by Sec.  1040.3(a)(4) if 
they do not involve providing information from the consumer's 
report,\922\ and, in the case of identity theft insurance, it may be 
excluded pursuant to Sec.  1040.3(b)(6) as the business of 
insurance.\923\
---------------------------------------------------------------------------

    \918\ See Bureau of Consumer Fin. Prot., ``What Does it Mean to 
Place a Security Freeze on My Credit Report?,'' (reporting that 47 
States have laws governing these freezes and the major consumer 
reporting agencies also provide credit freezes to consumers in the 
other States), https://www.consumerfinance.gov/askcfpb/1341/what-security-freeze-my-credit-report.html (Updated June 1, 2017).
    \919\ 15 U.S.C. 1681c-1(a)-(b).
    \920\ 15 U.S.C. 612(a)-(d).
    \921\ 15 U.S.C. 1679a(3)(B)(iii). Those depository institutions 
issuing credit cards have become a common provider of free credit 
scores to consumers. See Bureau of Consumer Fin. Prot., Notice of 
Public List of Companies Offering Existing Customers Free Access to 
a Credit Score, 81 FR 69046 (Oct. 5, 2016); Maria Jaramillo, ``Check 
Our New List to See if Your Credit Card Offers Free Access to One of 
Your Credit Scores,'' CFPB Blog Post (Mar. 2, 2017) (providing list 
of credit card issuers offering free credit scores), https://www.consumerfinance.gov/about-us/blog/check-our-new-list-see-if-your-credit-card-offers-you-free-access-one-your-credit-scores/.
    \922\ The Bureau similarly notes that credit education services 
(whether existing now or in the future) would not be covered by 
Sec.  1040.3(a)(4) if they do not involve providing information from 
the consumer's report.
    \923\ For example, identity theft insurance may be regulated 
under applicable State insurance laws. See, e.g., N.Y. Consol. 
State. Sec.  28-1113 (authorizing burglary and theft insurance to 
include identity theft insurance) & Sec.  28-3451 (regulating 
identity theft group insurance policies); Ariz. Rev. Stat. Sec.  20-
1694 (regulating identity theft group insurance policies); Code of 
Maine Rules part 02-31 Ch. 375 Sec.  3.4 (authorizing writing of 
group identity theft insurance).
---------------------------------------------------------------------------

    Relatedly, with respect to credit education services, the Bureau 
notes that the commenters' principal concern seems to be that consumers 
may not elect to use a CROA-compliant service. Although the commenters 
speculated that a brief waiting period before commencement of the 
service was a reason for this, the record did not establish that. In 
any event, as noted above, to the extent consumers voluntarily choose 
not to use a product or service, this does not mean that the product or 
service is not accessible to them.
    Insofar as compliance is not infeasible and cost increases are 
unlikely, commenters' primary concern appears to be that the 
disgorgement remedy available under CROA makes it difficult--if not 
impossible--for providers to irreversibly pass any increased costs on 
to consumers. This is because no matter how high a provider raises its 
prices, it may not be able to retain that increase to cover CROA 
liability in the event that all revenue must be returned to injured 
consumers. The Bureau is not persuaded for several reasons. First, the 
Bureau recognizes, as confirmed by the industry commenters, that a 
variety of identity theft prevention and remediation products or 
services may be bundled with credit monitoring, such as identity 
monitoring from non-FCRA sources, identity restoration services, and 
identity theft insurance. As noted above, these products and services 
would not be covered by Sec.  1040.3(a)(4) if they do not involve 
providing information derived from the consumer's file maintained by 
the consumer reporting agency, and in the case of identity theft 
insurance may be excluded pursuant to Sec.  1040.3(b)(6) as the 
business of insurance. Thus the impact of disgorgement would not 
necessarily fall on the entire bundled suite of services, but generally 
only on the credit monitoring component of those services (to the 
extent CROA applies and a violation occurs). The commenters did not 
assert that the CROA exposure that the provider of a bundled suite of 
services may face would be based on the fees consumers paid for the 
bundled suite of services. Accordingly, the Bureau believes this 
exposure, to the extent it exists, may be more limited for bundled 
services. Second, the Bureau further understands that, under CROA,\924\ 
the disgorgement remedy only applies to the amount paid by the person 
against whom a violation was committed. Thus, when a consumer receives 
credit monitoring for free from a firm in the event of a data breach, 
there are no consumer payments to be disgorged in a CROA class 
action.\925\ The Bureau notes that, increasingly, tens of millions of 
consumers receive free credit monitoring as the result of such 
breaches.
---------------------------------------------------------------------------

    \924\ 15 U.S.C. 1679g(a)(1).
    \925\ Cf. FTC v. Gill, 71 F.Supp.2d 1030, 1048 (C.D. Cal. 1999) 
(observing that the plain language of the damages provision of CROA 
does not allow the FTC to recover damages incurred by consumers). 
One of the industry commenters discussed above stated that over 130 
million consumers received some form of identity theft protection, 
which can include credit monitoring, in the previous year.
---------------------------------------------------------------------------

    For all of the reasons discussed above, the Bureau does not believe 
that it would be appropriate, in this rule, for the Bureau to 
substitute its judgment for that of Congress, which has so far not 
acted to restructure the scope of CROA in this area.
    With regard to other concerns raised by some commenters that the 
scope of proposed Sec.  1040.3(a)(4) was too narrow, the Bureau 
disagrees that the scope should be expanded. For example, the Bureau is 
not expanding the scope of proposed Sec.  1040.3(a)(4) to reach forms 
of identity monitoring services that do not involve providing consumers 
with consumer reports, credit scores, or information derived from 
consumer files at this time. Given the limited nature of the comments 
received, the Bureau has insufficient information in this rulemaking to 
develop a legal definition of this type of product or service. At the 
same time, however, the Bureau

[[Page 33340]]

disagrees with the industry association commenter that by focusing its 
coverage in Sec.  1040.3(a)(4) on information derived from CRA records, 
the Bureau is creating an un-level playing field by generating CROA 
class liability exposure for those market participants but not identity 
monitoring firms that rely on information from sources other than FCRA-
regulated consumer reporting agencies. This commenter noted, for 
example, that its product also scans the internet in addition to 
consumer reports; providing information derived from a general search 
of the Internet would not be subject to the rule, whether it is done by 
a person whose other products or services are covered, or by a person 
who is not covered by the rule at all. Where a product or service 
bundles together activities that are covered with activities that are 
not, the rule (Sec.  1040.4(a)(1), (a)(2), and (b)) still only applies 
to activities that are covered. Thus, participants in the market are 
being treated equally in that the rule equally excludes products or 
services outside its scope, regardless of who provides them. In any 
event, to the extent different types of identity monitoring products or 
services face different risks of being covered by CROA, that is a 
function of the scope of CROA.
    The Bureau also is not expanding the scope of proposed Sec.  
1040.3(a)(4) to include consumer reporting agency activities beyond 
those that involve providing consumer reports, credit scores, or 
information derived from a consumer file under FCRA. The Bureau is not 
persuaded that arbitration agreements affect these activities, and 
agrees with the industry association comment that it is unclear how a 
consumer reporting agency would be able to enter into an arbitration 
agreement with a consumer in this context. The Bureau may inquire into 
this question in its supervision and monitoring of the consumer 
reporting market. If arbitration agreements did appear to be limiting 
the ability of consumers to obtain relief from a consumer reporting 
agency in a FCRA class action, the Bureau could address that issue at a 
future time.
    With regard to the comments seeking an expansion of scope to cover 
furnishing, independent of other proposed coverage, the Bureau is not 
persuaded that it should do so at this time. The examples these 
commenters described pertained to furnishing by persons as part of a 
product or service that is already covered by the rule, such as debt 
collection (Sec.  1040.3(a)(10)) and servicing consumer credit (Sec.  
1040.3(a)(1)(v)). As stated in the section-by-section analyses of those 
provisions, furnishing in connection with these products or services 
already would be covered as part of the coverage of those products or 
services. For debt collection, this would be true whether the 
collection is on an extension of consumer credit, an automobile lease, 
a check, or a deposit account. Thus, the Bureau does not believe 
separately covering furnishing is necessary at this time.
3(a)(5)
    As explained in the proposal, the Bureau believed the proposal 
should apply to deposit and share accounts.\926\ Proposed Sec.  
1040.3(a)(5) would have included 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.
---------------------------------------------------------------------------

    \926\ 81 FR 32830, 32876 (May 24, 2016).
---------------------------------------------------------------------------

    TISA created uniform disclosure requirements for deposit and share 
accounts.\927\ TISA has existed since 1991 and the Bureau believes that 
banks and credit unions are familiar with TISA's application to 
accounts that they may offer. Accordingly, as explained in the 
proposal, the Bureau believed that defining the accounts the Bureau 
proposes to 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.
---------------------------------------------------------------------------

    \927\ 12 U.S.C. 4301(b).
---------------------------------------------------------------------------

    The Bureau did not receive comments on proposed Sec.  
1040.3(a)(5).\928\ The final rule adopts this provision as proposed.
---------------------------------------------------------------------------

    \928\ Some comments from providers of products and services 
covered by this proposed provision, such as credit union and 
community bank industry comments, sought an exemption from the rule. 
Because this request was not specific to these types of products, 
those comments are discussed separately, in the section-by-section 
analysis of Sec.  1040.4(b) below.
---------------------------------------------------------------------------

3(a)(6)
    As explained in the proposal, 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 believed the proposal 
should cover other accounts as well as remittance transfers subject to 
the EFTA.\929\ EFTA applies generally to ``consumer asset accounts,'' 
including those provided by nonbank companies as well as to most if not 
nearly all of the deposit and share accounts provided by depository 
institutions. Thus, proposed Sec.  1040.3(a)(6) would have included in 
the coverage for proposed part 1040 both 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.\930\ As explained in the proposal, the Bureau 
believed 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.
---------------------------------------------------------------------------

    \929\ 81 FR 32830, 32876 (May 24, 2016).
    \930\ 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 noted in the proposal that it had separately proposed a 
rule to extend the Regulation E definition of ``account'' to include 
``prepaid accounts.'' \931\ As the Bureau further noted, where the 
proposal on arbitration agreements 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 have applied 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 have been 
incorporated into proposed Sec.  1040.3(a)(6).
---------------------------------------------------------------------------

    \931\ Prepaid Accounts Under the Electronic Fund Transfer Act 
(Regulation E) and the Truth in Lending Act (Regulation Z), 79 FR 
77101 (Dec. 23, 2014) (proposing to define a new term, ``prepaid 
accounts,'' to include certain categories of accounts that were 
already subject to Regulation E as well as to certain categories 
that had historically been treated as excluded from the regulation). 
In the proposal for this rule concerning arbitration agreements, the 
Bureau sought 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). 81 FR 32830, 32876 n.470 (May 24, 2016).
---------------------------------------------------------------------------

    In the proposal, the Bureau noted that EFTA also regulates 
preauthorized electronic fund transfers (PEFTs) and store gifts cards 
and gift certificates. The Bureau had not proposed to include those 
activities as covered products or services under proposed Sec.  
1040.3(a)(6). The Bureau noted that certain gift cards and gift 
certificates redeemable only at a single store or affiliated group of 
merchants, while subject to Regulation E,\932\ are payment devices that 
merchants use to help consumers pay for their own goods or services, 
which as noted above and discussed in more detail below, the Bureau was 
not

[[Page 33341]]

proposing to cover except in limited circumstances. In addition, PEFTs, 
while not described as a separate category of coverage, generally would 
have been covered when offered as part of a covered product or service. 
For example, the Bureau understands that PEFTs are often 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 proposed Sec.  1040.3(a)(5) or (6), 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).
---------------------------------------------------------------------------

    \932\ See 12 CFR 1005.20(a).
---------------------------------------------------------------------------

    The Bureau received several comments related to proposed Sec.  
1040.3(a)(6). Some consumer advocates and nonprofits urged the Bureau 
to apply the rule to stored value products, regardless of whether they 
are accounts under Regulation E. One commenter noted that the 
enumerated laws do not evolve as quickly as the markets, leaving gaps 
in coverage. Two commenters raised specific concerns with prison 
release cards. One commenter stated that, regardless of whether they 
are covered as accounts under Regulation E, the rule should cover 
general use gift cards, non-merchant rewards cards, Supplemental 
Nutrition Assistance Program (SNAP) cards, and cards linked to health 
savings accounts, noting that some of these are network branded just 
like other types of cards that are covered under Regulation E.
    An industry trade association commenter in the consumer payments 
sector also stated that clarifications in the final rule should address 
the coverage of prepaid and stored value cards. The commenter did not 
say, however, whether the rule should include or exclude these 
products.
    The Bureau adopts Sec.  1040.3(a)(6) as proposed. Since the close 
of the comment period, the Bureau has adopted changes to the definition 
of ``account'' in Regulation E in its final prepaid accounts rule that 
it issued in October 2016. That rule, the relevant provisions of which 
are scheduled to take effect on April 1, 2018, expands the definition 
of account under Regulation E to include certain types of prepaid 
products not previously covered.\933\ Those types of prepaid accounts 
would therefore be included within the scope of coverage of accounts 
under Regulation E, upon the latter of the compliance date of this rule 
or the prepaid accounts rule. When prison release cards and general-use 
gift cards meet the definition of prepaid account in that rule,\934\ 
they would be covered by this rule. With respect to rewards programs, 
food stamp programs, and health savings accounts, these are generally 
not covered as accounts under Regulation E as revised by the prepaid 
accounts rule. The Bureau does not believe it would be necessary or 
appropriate to use this final rule as a vehicle for defining coverage 
of these types of products or services under the Dodd-Frank Act. The 
Bureau will continue to monitor the markets for stored value products 
and services not covered by this rule and may, at a future time, 
determine to adjust the scope of coverage of these markets in this 
rule.
---------------------------------------------------------------------------

    \933\ See 81 FR 83934 (Nov. 22, 2016); 82 FR 18975 (Apr. 25, 
2017) (setting effective date of April 1, 2018). See also Prepaid 
Accounts Under the Electronic Fund Transfer Act (Regulation E) and 
the Truth in Lending Act (Regulation Z), 82 FR 29630 (June 29, 2017) 
(proposal seeking comment on whether the effective date should be 
further delayed).
    \934\ Id. at 83968 (discussing coverage of prison release cards 
as prepaid accounts) and 83977 (discussing coverage of gift cards as 
prepaid accounts depending on several factors, including the nature 
of their marketing and labelling).
---------------------------------------------------------------------------

3(a)(7)
The Bureau's Proposal
    As explained in the proposal, the Bureau believed that the proposal 
should apply to transmitting or exchanging funds.\935\ Proposed Sec.  
1040.3(a)(7) would have included 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 to 
mean:
---------------------------------------------------------------------------

    \935\ 81 FR 32830, 32876-77 (May 24, 2016).

receiving currency, monetary value, or payment instruments from a 
consumer for the purpose of exchanging or transmitting the same by 
any means, including transmission by wire, facsimile, electronic 
transfer, courier, the Internet, or through bill payment services or 
through other businesses that facilitate third-party transfers 
---------------------------------------------------------------------------
within the United States or to or from the United States.

    For example, a business that provides consumers with domestic money 
transfers generally would have been covered by proposed Sec.  
1040.3(a)(7). As noted above, however, proposed Sec.  1040.3(a)(7) 
would not have applied 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 have applied, 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 have been 
covered by proposed Sec.  1040.3(a)(7). In addition, the Bureau 
believed that mobile wireless third-party billing services that engage 
in transmitting funds would have been covered by proposed Sec.  
1040.3(a)(7), as the Bureau understood that such services would not 
typically be integral to the provision of wireless telecommunications 
services.
Comments Received
    A consumer advocate commenter generally expressed support for the 
coverage in proposed Sec.  1040.3(a)(7). This commenter stated support 
for the view that this provision may apply to mobile wireless third-
party billing, asserting that cramming is a serious consumer protection 
problem and that arbitration agreements impede relief. This commenter 
urged the Bureau to narrow the proposed exclusion for transfers that 
are integral to a product or service not covered by the rule, to 
prevent evasion. The commenter stated that only transfers that are 
necessary and essential for a non-covered service should be excluded.
    An industry trade association commented, however, that, in their 
view, mobile wireless third-party billing is not a consumer financial 
product or service and therefore should not be cited as an example that 
would be covered by the rule.\936\ The commenter stated that any 
transmission of funds by a wireless telecommunications service provider 
is done for the third-party recipient of the funds and not for 
consumer, household, or family purposes within the meaning of the Dodd-
Frank Act. The commenter also stated that the rule should exclude 
mobile wireless third-party billing on policy grounds, in addition to 
legal authority concerns. Otherwise, the commenter asserted, providers 
would be required to engage in a nuanced and ongoing evaluation of each 
of their third-party relationships to determine whether those 
relationships give rise to coverage under the rule. In the commenter's 
view, because third-party billing services provide a relatively small 
revenue stream for mobile wireless companies and are merely incidental 
to its members' core wireless business, providers may choose to 
discontinue offering third-party billing services, which, in the 
commenter's

[[Page 33342]]

view, are desirable to consumers. The commenter explained that the 
covered product or service may be abandoned because, in its view, it 
would be infeasible for its member companies to create a compliance 
system and endure class action exposure just for this activity given 
that is so incidental and minor to the overall suite of products and 
services the companies provide to their customers. In addition, the 
commenter stated that if mobile wireless third-party billing were not 
excluded from the rule, then the Bureau should articulate the 
particular features of third-party billing that make it a product or 
service a covered by the rule.
---------------------------------------------------------------------------

    \936\ See also discussion of Sec.  1040.3(a)(1) above and Sec.  
1040.3(a)(8) below.
---------------------------------------------------------------------------

The Final Rule
    The Bureau is finalizing Sec.  1040.3(a)(7) as proposed, but 
changing the exclusion in two ways to prevent evasion and uncertainty. 
First, the Bureau sought comment on whether the Bureau should define 
the limitation on coverage in a different way, including whether the 
Bureau should adopt ``necessary or essential to a non-covered product 
or service'' as the limitation. Consistent with the consumer advocate's 
comment described above, as revised in the final rule, the limitation 
would apply only for transmitting or exchanging funds when necessary to 
a product or service that is not covered by the rule (which could 
include, for example, another consumer financial product or service 
that is not listed in Sec.  1040.3(a) or a nonfinancial good or 
service). The Bureau also is replacing the term ``integral,'' with the 
term ``necessary,'' which the Bureau believes is a narrower term.\937\ 
Second, the Bureau is clarifying that this limitation only applies when 
the non-covered products and services and the transmitting or 
exchanging funds are done by the same person. The Bureau is making this 
clarification to prevent confusion over whether arranging payments for 
goods or services sold by a third party is ``necessary'' to that sale. 
As clarified, Sec.  1040.3(a)(7) will cover transmitting or exchanging 
funds by one person to pay for a non-covered product or service 
provided by a third party, without regard to whether the funds 
transmitting or exchanging activity is ``necessary'' to the non-covered 
product or service.\938\
---------------------------------------------------------------------------

    \937\ See ``Merriam-Webster Online Dictionary'' (``necessary'' 
generally defined as ``absolutely needed,'' while ``integral'' may 
describe one thing that is ``formed as a unit with another part''), 
available at https://www.merriam-webster.com/dictionary (last 
visited May 30, 2017).
    \938\ For example, proposed Sec.  1040.3(a)(8) included a 
limitation for processing payments for a product or service that the 
provider itself sold or marketed. This clarification to limitations 
in this rule on the coverage of transmitting and exchanging funds in 
Sec.  1040.3(a)(7) therefore is consistent with the approach to the 
limitations in this rule on the coverage of payment processing in 
proposed Sec.  1040.3(a)(8).
---------------------------------------------------------------------------

    With regard to the industry trade association comment that stated 
that mobile wireless third-party billing is not a service undertaken 
for consumer, household, or family purposes within the meaning of the 
Dodd-Frank Act, the Bureau notes that the where the provider is acting 
as a bill payment service provider like other financial services 
providers,\939\ the Bureau believes this typically would be a service 
provided for consumer purposes. On the other hand, where the provider 
is simply acting as a merchant collecting funds for its own 
nonfinancial goods or services, that conduct generally would not be 
covered by Sec.  1040.3(a)(7). Thus, the coverage of Sec.  1040.3(a)(7) 
will depend on the nature of a person's funds transmitting and exchange 
activities.
---------------------------------------------------------------------------

    \939\ See 12 U.S.C. 5481(29) (defining ``transmitting or 
exchanging funds'' to include such activities carried out ``through 
bill payment services'').
---------------------------------------------------------------------------

    The Bureau recognizes that, to comply with the final rule, mobile 
wireless providers engaged in providing third-party billing services 
would need to analyze the extent to which their products or services 
include transmitting or exchanging funds for consumer purposes. The 
Bureau further recognizes that the scope of transmitting and exchanging 
funds under the Dodd-Frank Act has not been interpreted by regulation. 
Nonetheless, the Bureau is not persuaded by the suggestion in the 
comment that for providers to determine whether they are covered would 
be particularly burdensome. As noted in the proposal, the phrase 
transmitting and exchanging funds is defined in the Dodd-Frank 
Act.\940\ The elements of this financial product or service are 
therefore laid out there, including the reference to bill payment 
services, which the Bureau believes provides useful guidance.
---------------------------------------------------------------------------

    \940\ Id.
---------------------------------------------------------------------------

    In addition, to the extent the application of the rule creates an 
incentive for the provider to develop a compliance system and creates 
class action exposure for providers who fail to meet their legal 
obligations in delivering consumer financial services, these are the 
chief goals of this rulemaking. The findings in Part VI and the 
Bureau's Section 1022(b)(2) Analysis account for the fact that, on the 
margins, providers may forgo offering a product because they do not 
want to invest in compliance and make private aggregate relief 
available to consumers for that product. In addition, applying the rule 
to an incidental product or service would not create coverage for the 
provider's core product. If the provider included an arbitration 
agreement for the products and services that are not covered by the 
rule, the rule would not prohibit the provider from relying on that 
arbitration agreement for those products and services in a class 
action. Relatedly, as noted below, the provider would have the option, 
under the final rule, of including contract language that clarifies 
that some products or services provided are not covered by the rule, 
which would limit the impact of the Sec.  1040.4(a)(2) of the rule. 
Thus, the impact of the rule on the provider would presumably be in 
proportion to the importance that the covered product or service has to 
the provider.
3(a)(8)
The Bureau's Proposal
    As explained in the proposal, the Bureau believed that the proposal 
should cover certain types of payment and financial data 
processing.\941\ Proposed Sec.  1040.3(a)(8) therefore would have 
included 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 
by 15 U.S.C. 5481(18) \942\ 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 have clarified 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).
---------------------------------------------------------------------------

    \941\ 81 FR 32830, 32877 (May 24, 2016).
    \942\ As noted in the proposal, 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).'' Id. at 
n.472.
---------------------------------------------------------------------------

    The coverage of proposed Sec.  1040.3(a)(8) would not have included 
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 have been covered, for example, by 
providing the consumer with a mobile phone application (or app, for 
short) that accepts this data from the

[[Page 33343]]

consumer and transmits it to a merchant, a creditor, or others. An 
entity also would have been 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 have been covered 
by proposed Sec.  1040.3(a)(8).
    The Bureau notes that the breadth of proposed Sec.  1040.3(a)(8) 
would have been limited in several ways. First, the coverage of 
proposed Sec.  1040.3(a)(8) would not have included merchants, 
retailers, or sellers of nonfinancial goods or services when they are 
providing payment processing services directly and exclusively for the 
purpose of initiating payment 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 have stated 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 have 
applied 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 have reached, 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 have been covered by other provisions of proposed Sec.  
1040.3(a). This may include, 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).
Comments Received
    A public-interest consumer lawyer commenter stated that the 
exclusion in proposed Sec.  1040.3(a)(8) should not exclude sellers of 
automobiles, in particular when the payment being processed is for a 
loan to finance the purchase of the dealer's automobiles.
    A consumer advocate commenter recommended that the Bureau expand 
the scope of payment and financial data processing coverage in three 
ways. First, this commenter stated that the rule should explicitly 
cover electronic funds transfers (EFTs) and preauthorized electronic 
funds transfers (PEFTs) as those terms are defined in Regulation E. 
Second, this commenter stated that transfers of funds between accounts 
at the same financial institution, which are not EFTs under Regulation 
E, should be covered. Third, this commenter stated that the Bureau 
should remove the word ``directly'' from proposed Sec.  1040.3(a)(8), 
so that the rule would reach persons who work behind the scenes to 
arrange debiting funds from consumer accounts as part of work-at-home 
schemes, fake dating apps, or other schemes perpetrated by third 
parties who are not offering consumer financial products or services.
    This consumer advocate commenter also expressed support for 
coverage that would regulate mobile wireless third-party billing, 
asserting that cramming is a serious consumer protection problem and 
that arbitration agreements impede relief to consumers harmed by 
cramming practices. As noted above, an industry trade association, 
however, disagreed with the Bureau's observation that proposed Sec.  
1040.3(a)(8) could apply to mobile wireless third-party billing.\943\ 
This commenter stated that, in its view, mobile wireless third-party 
billing would not be covered by proposed Sec.  1040.3(a)(8) because the 
nonfinancial goods or services of the third party are virtually always 
marketed by the mobile wireless provider whether because of the scope 
of the provider's activities, or simply due to the nature of payment 
processing itself. For example, mobile wireless providers engage in 
promotional activities or distribute the nonfinancial good or service 
for which payment is made. The commenter also asserted that simply by 
making their payment channel available to pay for a given nonfinancial 
good or service, mobile wireless providers are marketing the 
nonfinancial goods or service because doing so promotes that good or 
service.
---------------------------------------------------------------------------

    \943\ See also section-by-section analysis of Sec.  1040.3(a)(1) 
and (a)(7) above.
---------------------------------------------------------------------------

The Final Rule
    For the reasons described in the proposal, and explained below, the 
final rule adopts Sec.  1040.3(a)(8) and comment 3(a)(8)-1 as proposed 
with minor edits for clarity. The proposal described the payment 
processing activity excluded from Sec.  1040.3(a)(8) based on whether 
it was to process a payment or card transaction for a nonfinancial good 
or service sold or marketed by the processor. Rather than using the 
term nonfinancial good or service, which is not defined, the Bureau 
believes it would be clearer to refer to goods and services that are 
not covered by Sec.  1040.3(a).\944\
---------------------------------------------------------------------------

    \944\ This revision is consistent with the wording of other 
limitations in Sec.  1040.3(a), including its paragraphs (1)(iii), 
(4), and (7).
---------------------------------------------------------------------------

    With regard to the public-interest consumer lawyer comment that 
stated that automobile dealers should not be excluded when processing 
payments on their loans, the Bureau does not believe an adjustment to 
Sec.  1040.3(a)(8) is necessary. As discussed in the proposal and 
further below with regard to Sec.  1040.3(b)(6), the Bureau's 
jurisdiction over certain automobile dealers and other merchants is 
constrained by the Dodd-Frank Act.\945\ The Bureau has conformed the 
scope of the rule to these limitations. Except when persons are 
excluded under Sec.  1040.3(b), however, the final rule treats 
providers that process payments on their own extension of consumer 
credit with a finance charge as engaged in servicing,\946\ debt 
collection, or both.
---------------------------------------------------------------------------

    \945\ See Dodd-Frank sections 1027 and 1029.
    \946\ See, e.g., Complaint at ] 97, Consumer Fin. Prot. Bureau 
v. Navient Corp., No. 17-00101 (M.D. Pa. Jan. 18, 2017) (alleging 
student loan servicer engaged in payment processing as part of its 
servicing activity).
---------------------------------------------------------------------------

    The Bureau disagrees with the consumer advocate commenter that any 
of the changes it seeks are necessary. The Bureau notes that EFTs and 
PEFTs will typically be covered pursuant to Sec.  1040.3(a)(5) or 
(a)(6) because they are made to or from an account as defined under 
EFTA or TISA and/or pursuant to Sec.  1040.3(a)(8) because they also 
are processed by persons who accept data directly from the consumer to 
initiate payments for services these persons neither sold nor marketed. 
Similarly, a transfer of funds between accounts need not be defined as 
covered payment processing, since the underlying accounts are already 
themselves covered, for example, by Sec.  1040.3(a)(5) and (a)(6).
    With regard to the commenter's suggestion to remove ``directly'' 
from proposed Sec.  1040.3(a)(8), the Bureau believes that limiting the 
scope of

[[Page 33344]]

Sec.  1040.3(a)(8) to situations involving the acceptance ``directly'' 
from the consumer is important because it helps to distinguish 
consumer-focused products and services from third-party, back-office 
operations.\947\ This term therefore increases clarity of coverage 
under this provision, facilitating implementation of the rule.
---------------------------------------------------------------------------

    \947\ The Bureau acknowledges section 1002(15)(A)(vii) does not 
include that term in defining data processing services that can be a 
type of consumer financial product or service, and that the Bureau's 
authority under the statute reaches more broadly than does Sec.  
1040.3(a)(8). However, in this rule, the Bureau does not believe it 
is necessary to incorporate the entire scope of Dodd-Frank section 
1002(15)(A)(vii). To the extent a back-office processor is an 
affiliated service provider to a provider of a product or service 
covered by Sec.  1040.3(a), that back-office processor may still be 
covered by the rule as a provider pursuant to Sec.  1040.2(d)(2).
---------------------------------------------------------------------------

    The Bureau agrees with the industry trade association comment that, 
when a mobile wireless provider markets its own nonfinancial goods or 
services, then any payment processing the mobile wireless provider 
provides to the consumer in the course of purchasing the nonfinancial 
good or service it has marketed to the consumer would not be covered by 
Sec.  1040.3(a)(8) because this provision specifically excludes such 
situations. However, the Bureau disagrees with the commenter's view 
that merely providing payment processing services constitutes marketing 
of the goods or services for which the payments are being processed so 
as to warrant categorically excluding third-party billing from the 
scope of the rule. In the Bureau's experience, this view is overbroad 
and could render the coverage in Sec.  1040.3(a)(8) meaningless because 
an exception for simply facilitating payment of goods or services would 
swallow the rule. While it is true that making a payment method 
available can facilitate sales of a product, the Bureau does not 
believe that act by itself would constitute marketing as the Bureau 
interprets that term in the context of this regulation. To be eligible 
for the marketing exclusion, a payment processor would need to be 
engaged in marketing activity for the nonfinancial good or service 
independent of the payment processing activity itself.\948\
---------------------------------------------------------------------------

    \948\ More broadly, for the reasons already discussed in the 
response to this comment in the section-by-section analysis of Sec.  
1040.3(a)(7) above, the Bureau does not agree that a blanket 
exemption for mobile wireless third-party billing is warranted. For 
the reasons the industry trade association commenter noted, to the 
extent mobile wireless third-party billing providers are processing 
payments for nonfinancial goods or services they market, Sec.  
1040.3(a)(8) would not apply to them.
---------------------------------------------------------------------------

3(a)(9)
    As stated in the proposal, the Bureau believed that the proposal 
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 have included in the coverage of 
proposed part 1040 check cashing, check collection, or check guaranty 
services, which are types of consumer financial products or services 
identified in Dodd-Frank section 1002(15)(A)(vi).
    The Bureau did not receive comments on its proposal to cover 
cashing checks for consumers and associated check collection and check 
guaranty services. The final rule adopts proposed Sec.  1040.3(a)(9) as 
proposed. The Bureau also notes that, as discussed below in the 
section-by-section analysis of Sec.  1040.3(a)(10), furnishing in 
connection with debt collection would be covered as a collection 
activity. This also would be true for furnishing in connection with 
covered check collection or check guaranty activity.
3(a)(10)
The Bureau's Proposal
    As explained in the proposal, the Bureau believed that the proposal 
should apply to debt collection activities arising from consumer 
financial products and services covered by paragraphs (1) through (9) 
of proposed Sec.  1040.3(a).\949\ 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 proposal, the Bureau was 
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 that would have been covered by 
proposed Sec.  1040.3(a) may lead to collections; the Bureau was 
concerned that if any of these collection activities were not 
separately covered, collectors in these cases could seek to invoke 
arbitration agreements.
---------------------------------------------------------------------------

    \949\ 81 FR 32830, 32878-79 (May 24, 2016).
---------------------------------------------------------------------------

    As the proposal explained, the Bureau believed that collections 
coverage was particularly important because the Study showed that class 
actions alleging violations of the FDCPA were the most common type of 
class actions filed across the six significant markets that the Bureau 
studied. Debt collection class settlements were also by far the most 
common type of class action settlement in all of consumer finance,\950\ 
which in turn suggested 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. The proposal added that, 
particularly in light of the fact that collectors often bring suit 
against consumers and the history discussed in Part II of the proposal 
concerning serious fairness concerns raised in connection with the 
filing of numerous debt collection claims with a particular arbitration 
administrator, the Bureau believed that application of the proposal to 
collection activities may be one of the most important components of 
the rule.
---------------------------------------------------------------------------

    \950\ See Study, supra note 3, section 6 at 19 and section 8 at 
12.
---------------------------------------------------------------------------

    Specifically, proposed Sec.  1040.3(a)(10) would have applied 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 (1) through (9) of proposed Sec.  1040.3(a). For clarity, 
proposed Sec.  1040.3(a)(10) would have identified the specific types 
of entities that the Bureau understands typically are engaged in 
collecting these debts: (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 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 (iii) a debt 
collector as defined by the FDCPA, 15 U.S.C. 1692a(6). The proposed 
coverage of each of these types of entities engaged in debt collection 
is described separately below.
    Proposed Sec.  1040.3(a)(10)(i) would have applied 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,\951\ or 
a person acting on behalf of such person or affiliate. This coverage 
would have included, for example, collection by a creditor extending 
consumer credit. The Bureau noted in the proposal, however, that as 
with proposed Sec.  1040.3(a)(1) discussed above, proposed Sec.  
1040.3(a)(10)(i) would not have extended 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

[[Page 33345]]

affiliates on credit they extend would have been exempt in the 
circumstances described in proposed Sec.  1040.3(b).
---------------------------------------------------------------------------

    \951\ As proposed comment 3(a)(10)-2 would have clarified, 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.''
---------------------------------------------------------------------------

    In addition, proposed Sec.  1040.3(a)(10)(ii) would have covered 
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 have reached such persons even when proposed Sec.  
1040.3(b) would have excluded the original creditor from coverage. For 
example, such collection activities by acquirers or purchasers would 
have been covered even when the original creditor, such as a government 
or merchant, would have been 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 have been 
covered by proposed Sec.  1040.3(a)(10)(ii), even in circumstances 
where proposed Sec.  1040.3(b)(5) would have excluded the medical 
creditor from coverage.\952\ In other words, although hospitals, 
doctors, and other service providers extending incidental ECOA consumer 
credit would not have been subject to the requirements of Sec.  1040.4 
to the extent proposed Sec.  1040.3(b)(5) would have excluded them from 
coverage because the Bureau lacks rulemaking authority over them under 
Dodd-Frank section 1027 or they would have been excluded under another 
provision of proposed Sec.  1040.3(b), an acquirer or purchaser of such 
consumer credit generally would have been subject to proposed Sec.  
1040.4.\953\
---------------------------------------------------------------------------

    \952\ As noted in the proposal, 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.''). 81 FR 32830, 32878 
n.475 (May 24, 2016).
    \953\ As the proposal further noted, 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). In this 
connection, the proposal also noted, that other regulatory guidance 
in the past has indicated that a ``health care provider'' is a 
creditor under ECOA if it ``regularly bill[s] 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 healthcare providers need to know,'' Modern 
Medicine Network (Jan. 11, 2010), available at http://www.modernmedicine.com/modern-medicine/news/modernmedicine/modern-medicine-feature-articles/red-flags-rule-what-healthcare-. The 
Bureau stated in the proposal that it was not interpreting ECOA or 
Regulation B. 81 FR 32830, 32878 n.476 (May 24, 2016).
---------------------------------------------------------------------------

    The proposal explained that the Bureau believed that many 
activities involved in the collection of debts arising from extensions 
of consumer credit would also constitute servicing under proposed Sec.  
1040.3(a)(1)(v). However, the Bureau was proposing the coverage of 
collection activities by any other person acting on behalf of the 
provider or affiliate in proposed Sec.  1040.3(a)(10)(i) and (ii) to 
confirm that collection activity by such other persons would have been 
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) 
described below) because they are not collecting on an account obtained 
in default.\954\ By proposing coverage of debt collection by such other 
persons, the Bureau also sought 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, the proposal explained that in some contexts ``servicing'' may 
be used in the industry to refer to 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.\955\ Both types of collection activity would 
have been covered under the proposal.
---------------------------------------------------------------------------

    \954\ 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'').
    \955\ See Fed. Trade Comm'n, ``The Structure and Practices of 
the Debt Buying Industry,'' at 13 n.57 (Jan. 2013), available at 
https://www.ftc.gov/sites/default/files/documents/reports/structure-and-practices-debt-buying-industry/debtbuyingreport.pdf (``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.'').
---------------------------------------------------------------------------

    As discussed in the proposal as described 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 and subjects them to its various statutory 
requirements and prohibitions against abusive collection 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 have 
included in the coverage of proposed part 1040 collecting debt by a 
debt collector as defined by the FDCPA, 15 U.S.C. 1692a(6),\956\ when 
the debt arises from any consumer financial products and services 
described in proposed Sec.  1040.3(a)(1) through (9).
---------------------------------------------------------------------------

    \956\ As the proposal explained, 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 proposal. 81 FR 32830, 32879 n.479 
(May 24, 2016).
---------------------------------------------------------------------------

    As discussed in the proposal as described above, the Bureau 
believed 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, 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 have extended 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 believed that 
proposed Sec.  1040.3(a)(10)'s references to these existing regulatory 
regimes would facilitate compliance, since the Bureau expected that 
industry has substantial experience with existing contours of coverage 
under the FDCPA and ECOA. As discussed above, proposed Sec.  
1040.3(a)(10)(ii) would have applied proposed part 1040 to purchasers 
of consumer credit extended by persons over whom the Bureau lacks 
rulemaking 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 have applied 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 rulemaking 
authority under Dodd-Frank section 1027 or 1029 or who otherwise would 
have been exempt under proposed Sec.  1040.3(b).
    The Bureau recognized that FDCPA debt collectors do not typically 
become

[[Page 33346]]

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. As the proposal 
explained, however, there are a number of ways in which the proposal 
would have regulated or otherwise affected the conduct of debt 
collectors. First, under proposed Sec.  1040.4(a)(1), described below, 
the debt collector would have been prohibited from invoking a pre-
dispute arbitration agreement in a class action dispute concerning such 
collection activities. Second, 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 would have been 
covered by the proposal, then the debt collector may 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 have 
required the collector to include the prescribed language in that pre-
dispute arbitration agreement.\957\
---------------------------------------------------------------------------

    \957\ See proposed comment 4-1.
---------------------------------------------------------------------------

    Proposed comment 3(a)(10)-1 would have further clarified that 
collecting debt by persons listed in Sec.  1040.3(a)(1) would have been 
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.
Comments Received
    A debt collection industry trade association challenged the 
Bureau's findings generally, mostly echoing other industry comments 
criticizing the proposal and the class rule in particular, as discussed 
above in Part VI. In addition, this commenter asserted that individual 
arbitration was superior to class litigation in consumer disputes. Some 
of the reasons it offered in support of this claim were specific to 
debt collection. For example, the commenter stated that in debt 
collection disputes, consumers place a particularly high value on 
confidentiality, which it believed arbitration better preserves. It 
also stated that debt collection claims are simpler to adjudicate, and 
thus suited to a simpler dispute process, which it believed arbitration 
offers. The commenter also noted that debt collectors, and small 
entities in particular, can use creditors' arbitration agreements to 
avoid the burdens of challenging flawed class litigation.
    Three public-interest consumer lawyer commenters and a consumer 
advocate commenter supported the proposed coverage of debt collection, 
which in their view was one of the most important components of the 
proposed coverage. One of the public-interest consumer lawyers stated 
that a significant portion of the complaints these commenters have seen 
pertain to unfair debt collection practices. The consumer advocate 
commenter also noted the prevalence of class actions addressing debt 
collection problems as providing support for coverage of debt 
collection in the proposal. A public-interest consumer lawyer commenter 
also expressed support in particular for the coverage in proposed Sec.  
1040.3(a)(10)(i) and (ii), noting its understanding that these 
provisions would apply even when the covered person is not a debt 
collector as defined in the FDCPA, and also when the debt being 
collected arises from other covered activities beyond extending 
consumer credit. Another public-interest consumer lawyer commenter 
asserted that recourse to class actions for violation of debt 
collection laws is critically important for the protection of 
consumers. This commenter also stated that coverage of collection by 
third parties on consumer credit extended by exempt persons, such as 
medical providers, was particularly important. It stated that it has 
seen a number of instances of improper medical billing or collection 
practices, indicating that coverage in this rule is important.
    The consumer advocate commenter also urged the Bureau to clarify 
that, with regard to proposed Sec.  1040.3(a)(10)(iii), the FDCPA 
applies to debt buyers. For example, collectors may collect on debts 
they have purchased arising from deposit accounts, automobile leases, 
or check collection activities.\958\ In addition, this commenter urged 
the Bureau to confirm that furnishing is among the debt collection 
activities included within the scope of proposed Sec.  1040.3(a)(10). 
This commenter similarly urged that the rule explicitly cover consumer 
financial products that are ancillary to a covered product, such as 
payment processing that is ancillary to debt collection.
---------------------------------------------------------------------------

    \958\ One public-interest consumer lawyer commenter also stated 
that the rule should apply to this type of collection activity.
---------------------------------------------------------------------------

    Finally, the consumer advocate commenter urged the Bureau to 
clarify that proposed Sec.  1040.3(a)(10)(i) covers third parties 
acting on behalf of an exempt creditor or its affiliate when collecting 
on a debt arising from a covered consumer financial product or service. 
As an example, this commenter referred to a third-party collector of a 
medical credit account.
The Final Rule
    The Bureau adopts Sec.  1040.3(a)(10) and its commentary in 
comments 3(a)(10)-1 and 3(a)(10)-2 as proposed.
    The industry trade association commenter's criticisms of the class 
rule were principally directed at the findings in support of rule as a 
whole, and are therefore addressed in Part VI above and, to the extent 
they relate to small entities, in the discussion of the potential 
alternative of a small entity exemption in Part IX below. With regard 
to the commenter's assertion that individual arbitration is superior to 
class litigation of debt collection disputes, the Bureau emphasizes 
that, as discussed in Part VI, creditors may continue to make 
individual arbitration available, which may also make it available for 
disputes with debt collectors. In addition, with regard to its claim 
that arbitration better protects consumer confidentiality, the Bureau 
notes that arbitration also depends on courts for enforcing awards, 
which may expose consumers to the same confidentiality concerns as 
individual litigation (indeed, the Bureau understands that many of the 
debt collection arbitrations in NAF discussed in Part II led to court 
actions to enforce arbitral awards in debt collection) and further 
that, according to the Study, the majority of arbitration agreements 
did not have confidentiality provisions.\959\ In any event, 87 percent 
of the individual lawsuits in Federal court analyzed in the Study 
asserted FDCPA claims,\960\ indicating that individual litigation is 
most often used in consumer finance markets for debt collection claims. 
This data suggests that for those consumers intent on bringing suit, 
litigation is a viable alternative.
---------------------------------------------------------------------------

    \959\ Study, supra note 3, section 2 at 52 tbl. 10.
    \960\ Id. section 2 at 27 fig. 6.
---------------------------------------------------------------------------

    The Bureau agrees with the consumer advocate comment that, as 
proposed, Sec.  1040.3(a)(10) would apply to a third party collecting 
on consumer credit originated by an exempt person, such as a medical 
provider exempt in circumstances described in proposed Sec.  
1040.3(b)(6).\961\ The rule confirms this in comment 2(c)-1.i, 
discussed above.
---------------------------------------------------------------------------

    \961\ See, e.g., Syndicated Office Systems, LLC, 2015-CFPB-0012, 
Consent Order (June 18, 2015), available at http://files.consumerfinance.gov/f/201506_cfpb_order-syndicated.pdf (Bureau 
finding that affiliate of hospital chain engaged in collection on 
debts originated by the hospital and other non-affiliated medical 
providers was a ``covered person'' subject to the Bureau's 
enforcement jurisdiction).

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

[[Page 33347]]

    With regard to the consumer advocate commenter's request that this 
rule clarify the coverage of debt buyers under the FDCPA, the Bureau is 
not, in this rulemaking, interpreting the scope of the FDCPA. The scope 
of that statute as it stands now therefore determines the scope of 
Sec.  1040.3(a)(10)(iii). The Bureau also notes, however, that the 
Supreme Court recently issued a decision holding that a debt buyer 
collecting on its own behalf debts that it purchased was not collecting 
or attempting to collect, directly or indirectly, debts owed or due or 
asserted to be owed or due to another within the meaning of the 
FDCPA.\962\ In any event, any future interpretation of the FDCPA will 
be automatically incorporated by reference into the scope of this rule, 
as described above. Moreover, a debt buyer engaged in collection on a 
consumer credit account they purchase generally would be covered by 
Sec.  1040.3(a)(10)(ii), which covers collecting debt by a purchaser of 
consumer credit, even when the purchaser is not a debt collector under 
the FDCPA.\963\ Therefore, the Bureau declines to address, at this 
time, the commenter's request concerning the FDCPA's coverage of debt 
buyers.
---------------------------------------------------------------------------

    \962\ Henson, et al. v. Santander Consumer USA, Inc., No. 16-349 
(Slip Op. June 12, 2017).
    \963\ As discussed in the proposal, servicing and collection 
activity may overlap. As a result, the debt buyer also may be 
covered under Sec.  1040.3(a)(1)(iv)-(v) which generally cover 
purchasing and servicing consumer credit accounts.
---------------------------------------------------------------------------

    With regard to the consumer advocate commenter's request to confirm 
that furnishing is a debt collection activity, when a person is 
collecting debt within the meaning of Sec.  1040.3(a)(10), the Bureau 
agrees that if that person furnishes information on that debt in the 
course of that debt collection, then furnishing falls within the scope 
of the rule. The relevant factor is therefore whether the furnishing is 
done in the course of the debt collection, and not whether the debt 
collector is required to engage in the furnishing. However, the only 
commenter to address this question was this consumer advocate; the 
Bureau did not receive any other comments indicating uncertainty over 
the coverage of furnishing by debt collectors as a debt collection 
activity. Therefore, the Bureau believes this clarification is 
sufficient.
    With regard to the consumer advocate comment concerning coverage of 
payment processing that may be ancillary to debt collection activities, 
the Bureau agrees that this would be covered by Sec.  1040.3(a)(10) 
regardless of whether it is also covered by any other provision in 
Sec.  1040.3(a). The Bureau interprets the term debt collection to 
include processing payments made by consumers as part of debt 
collection activity (i.e., processing payments consumers make to 
satisfy a debt). However, the only commenter to address this question 
was this consumer advocate; the Bureau did not receive any other 
comments indicating uncertainty over the coverage of payment processing 
that may be ancillary to debt collection activities. The Bureau does 
not believe this example supports the commenter's broader claim that 
the rule should cover any consumer financial product or service that is 
ancillary to another covered product. The Bureau is concerned that that 
type of coverage definition could lead to uncertainty and would not 
facilitate compliance and administration of the rule.
3(b) Exclusions From Coverage
    Proposed Sec.  1040.3(b) would have identified the set of 
conditions under which certain persons would have been excluded from 
the coverage of proposed part 1040 when providing a certain products or 
services that were otherwise covered by proposed Sec.  1040.3(a).\964\ 
As discussed above, if an exclusion in proposed Sec.  1040.3(b) did not 
apply to a person that offers or provides a product or service 
described in proposed Sec.  1040.3(a), that person would have met the 
definition of a provider in proposed Sec.  1040.2(c) and would have 
been subject to the proposal. The exclusion was structured to be 
specific to the provision of particular products and services listed in 
1040.3(a). In other words, even if an exclusion in proposed Sec.  
1040.3(b) would have applied to a person offering or providing one 
particular product or service, that person still would have been 
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) would not have applied to that second product or service.
---------------------------------------------------------------------------

    \964\ As the proposal noted, certain additional limitations 
would have been inherent in proposed Sec.  1040.3(a). 81 FR 32830, 
32879-80 (May 24, 2016). 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) 
referenced 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. 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 . . . .''). These 
limitations would have been incorporated into the coverage of 
proposed part 1040, regardless of whether they were explicitly 
mentioned in the text of the regulation or the commentary of the 
proposal.
---------------------------------------------------------------------------

    For illustrative purposes, the Bureau noted in the proposal that 
persons offering or providing consumer financial products or services 
covered by proposed Sec.  1040.3(a) described above would have 
included, without limitation, banks, credit unions, credit card 
issuers, certain automobile lenders, automobile 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.\965\
---------------------------------------------------------------------------

    \965\ 81 FR 32830, 32880 (May 24, 2016). The Bureau discussed 
the examples as well as other types of entities that would have been 
covered in certain circumstances in the section-by-section analysis 
to proposed Sec.  1040.3 described above. In addition, the Bureau 
noted in the proposal that, 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. Id. at n.482.
---------------------------------------------------------------------------

    Some commenters sought exclusions for certain persons, rather than 
certain products or services. Comments concerning a possible small 
entity exemption are discussed in Part IX below. In addition, a number 
of credit union and community bank industry commenters sought an 
exemption from the rule, for a variety of reasons. For example, credit 
union commenters cited their member-owned, not-for-profit cooperative 
structure\966\ as providing adequate accountability incentives to 
comply with the law, such that class actions are not necessary. A 
community bank commenter similarly stated that community banks are 
relationship-oriented, and the need to develop customer relationships 
and retain customers provided an adequate incentive to comply with the 
law. Credit union commenters also generally

[[Page 33348]]

asserted that their customers are more likely to experience higher 
costs from the proposal because their customers are owners who would 
experience reduced dividends as a result of increased costs from the 
rule.\967\
---------------------------------------------------------------------------

    \966\ See generally Nat'l Credit Union Admin. ``Is a Credit 
Union Right For Me,'' https://www.mycreditunion.gov/about-credit-unions/Pages/Is-a-Credit-Union-Right-for-Me.aspx (last visited June 
22, 2017) (``Credit unions are democratically run financial 
institutions providing each credit union member one vote. Members 
vote on those from the membership who are running for the credit 
union's board of directors, as well as any other credit union 
official positions open for election at the annual membership 
meeting.'').
    \967\ Two credit union industry trade associations also noted 
that there may be impacts on credit unions engaged in the indirect 
automobile lending market where automobile dealers originating the 
loans use arbitration agreements. Those comments are discussed in 
the Bureau's Section 1022(b)(2) Analysis. In addition, another 
credit union industry commenter stated that credit unions not 
currently using arbitration agreements still needed an option of 
using arbitration agreements in the future to block TCPA class 
actions in light of concerns over uncertainties or ambiguities in 
the TCPA. As explained in Part VI, the Bureau finds that the class 
rule is in the public interest and for the protection of consumers 
notwithstanding that there may be questions regarding legal 
interpretations of laws that can be enforced through class actions.
---------------------------------------------------------------------------

    Other comments on the proposed exemptions and the Bureau's analysis 
of those comments are discussed in the section-by-section analysis of 
each proposed exclusion below.\968\
---------------------------------------------------------------------------

    \968\ As discussed further below, the Bureau also received some 
comments that requested exemptions from the rule on bases other than 
the identity of the provider. The Bureau does not consider these 
requests to be requests for exemptions from the scope of coverage 
per se, but instead as requests for the Bureau to consider certain 
alternatives to or limitations on the substantive regulation itself. 
For example, a request to exclude certain causes of action providing 
for statutory damages or recovery of attorney's fees from the class 
proposal is discussed in Part VIII. In addition, the Bureau's 
consideration of other potential alternatives raised by commenters, 
such as not applying the class proposal to matters that providers 
self-report to regulators, is discussed in the analysis of impacts 
of the rule in Part VIII.
---------------------------------------------------------------------------

    The Bureau is adopting the text in the introductory paragraphs of 
Sec.  1040.3(b) as proposed, with a minor clarification to account for 
the fact that some exclusions apply more broadly to particular parties, 
rather than simply with regard to specific consumer financial products 
or services.\969\
---------------------------------------------------------------------------

    \969\ Rather than referring to the exclusions as for persons to 
the extent they are providing consumer financial products or 
services specified in Sec.  1040.3(b), the introductory paragraph in 
the final rule states that the exclusions apply in the circumstances 
described in Sec.  1040.3(b). This is more accurate because some of 
the exclusions do not refer to particular consumer financial 
products or services.
---------------------------------------------------------------------------

    With regard to the exemptions requested by credit union and 
community bank commenters, the Bureau is not adopting such exemptions 
in the rule as discussed further in Part VI above and the Section 
1022(b)(2) Analysis below. As discussed in the section-by-section 
analysis of Sec.  1040.3(b)(2) below, the Bureau has determined in the 
final rule that democratic accountability structures are an 
insufficient basis for excluding governments from the rule. With regard 
to an exemption for credit unions, the Bureau similarly believes that 
shareholder ownership, while providing a form of democratic shareholder 
accountability over the credit union, is not a sufficient compliance 
incentive to replace a right to enforce the laws on a class basis. The 
Bureau further believes that the presence of a financial institution in 
a community, such as a credit union or community bank, with the 
interest of developing and retaining customers in that community, also 
is not a sufficient compliance incentive to replace a right to enforce 
those laws on a class basis.\970\ With regard to the potential for pass 
through of costs of the rule to consumers who also have ownership 
interests in credit unions, as discussed in the Bureau's Section 
1022(b)(2) Analysis below, the member-ownership structure for credit 
unions may make it slightly more likely that consumers would face 
reduced earnings as owners, if costs are not passed through to them as 
customers. Nonetheless, the Bureau has already considered the potential 
for pass through of costs of the rule to customers in its Section 
1022(b)(2) analysis. The fact that credit unions may pass through costs 
to consumers as owners, even when costs are not passed through by way 
of product pricing, does not change the nature of its findings in Part 
VI above.
---------------------------------------------------------------------------

    \970\ The Bureau's response to these comments is further 
detailed in Part VI.C.1 above.
---------------------------------------------------------------------------

3(b)(1)
The Bureau's Proposal
    Proposed Sec.  1040.3(b)(1) would have excluded from the coverage 
of proposed part 1040 broker-dealers to the extent they are providing 
any products or 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-dealers'' 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.\971\ Broker-
dealers may provide products that were 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 proposed to 
exclude such persons from coverage to the extent they were 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.
---------------------------------------------------------------------------

    \971\ See 15 U.S.C. 78c(4)-(5) (defining the terms broker and 
dealer under the Securities Exchange Act).
---------------------------------------------------------------------------

    As discussed above and in the proposal,\972\ 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 agreements to 
class actions filed in court.\973\ The SEC, which must authorize FINRA 
rules, authorized the original version of this rule in 1992.\974\ The 
Bureau also noted that claims in FINRA arbitration between customers 
and broker-dealers are filed with FINRA,\975\ which is overseen by the 
SEC, and all awards between customers and broker-dealers under FINRA 
rules must be made public.\976\ Proposed comment 3(b)(1)-1 would have 
clarified 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 have been excluded from the coverage of 
proposed part 1040.
---------------------------------------------------------------------------

    \972\ 81 FR 32830, 32880-81 (May 24, 2016).
    \973\ FINRA, ``Requirements When Using Predispute Arbitration 
Agreements for Customer Accounts,'' at 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, ``Class Action Claims,'' at Rule 12204(d).
    \974\ Self-Regulatory Organizations; National Association of 
Securities Dealers, Inc.; Order Approving Proposed Rule Change 
Relating to the Exclusion of Class Actions from Arbitration 
Proceedings, Exchange Act Release No. 31371, 1992 WL 324491, (Oct. 
28, 1992).
    \975\ FINRA, ``Filing an Initial Statement of Claim; Filing 
Claim with the Director,'' at Rule 12302(a) (providing that claimant 
must file an initial claim with the Director of the FINRA Office of 
Dispute Resolution).
    \976\ FINRA, ``Awards,'' at Rule 12904(h) (``All awards shall be 
made publicly available.'').
---------------------------------------------------------------------------

    The proposal also identified a CFTC regulation requiring that pre-
dispute arbitration agreements in customer agreements for certain 
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

[[Page 33349]]

agreement if he or she separately signs it, among other 
requirements.\977\ 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 therefore stated in the 
proposal its belief that the proposal could have provided important 
consumer protections for providers that might also be subject to the 
CFTC's regulation. The Bureau also believed 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 did not 
propose an exemption for those persons, and instead sought further 
comment on the approach to CFTC-regulated persons.
---------------------------------------------------------------------------

    \977\ 17 CFR 166.5.
---------------------------------------------------------------------------

    Thus, under the proposal, any product or service that would be 
subject to both the Bureau's proposal and the CFTC rule \978\ therefore 
would have needed to meet the requirements of both rules. For example, 
any pre-dispute arbitration agreement subject to both rules would have 
needed to satisfy the CFTC requirements to ensure the contract is 
voluntary and contain the provision mandated by proposed Sec.  
1040.4(a)(2).\979\
---------------------------------------------------------------------------

    \978\ The Bureau noted in the proposal its understanding that 
foreign currency spot transactions are not covered by the CFTC rule. 
81 FR 32830, 32881 n.492 (May 24, 2016). 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'') and 
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.'').
    \979\ If a provider offers products or services that would have 
been covered by the proposal, such as consumer credit, and others 
that would not have been covered, the provider would have been 
permitted to use contract language that is tailored to such a 
circumstance. See proposed Sec.  1040.4(a)(2)(ii).
---------------------------------------------------------------------------

Comments Received
    The Bureau consulted with the SEC and CFTC prior to issuing the 
proposal and after the close of the comment period and received a 
formal comment letter from the staff of the CFTC. In addition, the 
Bureau received comments from an industry trade association whose 
members include both broker-dealers and investment advisers regulated 
by the SEC, an investment adviser industry trade association, and an 
industry trade association representing futures commission merchants 
regulated by the CFTC. These comments generally expressed an opinion 
that the Bureau lacks any authority under the Dodd-Frank Act to 
promulgate rules governing the conduct of SEC- or CFTC-regulated 
persons when acting in a regulated capacity. The commenters referenced 
provisions in Dodd-Frank section 1027 and in the Act's legislative 
history that, in their view, support that position.
    With respect to broker-dealers and investment advisers, the broker-
dealer and investment adviser trade association commenters also stated 
that their position was further supported by language in Dodd-Frank 
section 1002(15)(A)(vii), which excludes ``services related to 
securities'' from the general definition of financial advisory products 
or services that are subject to the Bureau's Dodd-Frank Act 
jurisdiction.\980\ With respect to futures commission merchants, the 
CFTC and futures industry trade association stated that the CEA confers 
exclusive jurisdiction on the CFTC over CFTC-regulated products or 
services.\981\ As a result, these commenters asserted that the final 
rule need not exempt these persons because the Bureau cannot regulate 
them in this rulemaking. Instead, commenters requested that the Bureau, 
in the final rule, state that it has no regulatory authority over these 
persons under Dodd-Frank section 1028 and title X of the statute more 
broadly.\982\
---------------------------------------------------------------------------

    \980\ Section 1002(15)(A)(vii) covers ``providing financial 
advisory services'' as defined in that provision, which specifically 
excludes ``services related to securities provided by a person 
regulated by the [Securities and Exchange] Commission or a person 
regulated by a State securities Commission, but only to the extent 
that such person acts in a regulated capacity) . . .''
    \981\ 7 U.S.C. 1 et seq.
    \982\ One of these trade associations also stated that, if the 
Bureau pursued the contrary view and sought to cover any of these 
persons, there also may be confusion over which types of claims 
relate to the covered products or services, and which ones relate to 
other products or services they provide. To address this, they 
requested that the final rule clarify when a claim is ``related'' to 
a covered product or service. That comment is discussed in the 
section-by-section analysis of Sec.  1040.4(a) below.
---------------------------------------------------------------------------

    The industry trade associations also observed that the Bureau's 
Study did not analyze the use of arbitration agreements by their 
members. The commenters also did not identify any consumer financial 
products or services provided by their investment adviser or futures 
commission merchant members that could be subject to this rule. With 
respect to broker-dealers, a securities industry trade association, 
whose members include broker-dealers who are also registered investment 
advisers, stated that broker-dealers provide margin loans to purchase 
securities, and may also provide payment processing or remittances in 
certain circumstances. In the view of this industry trade association, 
however, these products or services were related to securities within 
the meaning of Dodd-Frank section 1002(15)(A)(vii), and, as a result of 
this relationship, excluded from the rulemaking authority of the 
Bureau. The commenter asserted that this would be the case regardless 
of whether the services relating to securities were financial advisory 
in nature, but further asserted that the products or services do relate 
to financial advisory services that broker-dealers provide. The 
industry trade association asked the Bureau to identify what covered 
products and services that, in the Bureau's view, broker-dealers 
provide. This commenter also stated that neither it nor its members 
were aware of any covered products or services that investment advisers 
provide, and asked the Bureau to specifically identify any such covered 
products or services of which it was aware.
    A trade association of consumer lawyers stated in its comment 
letter that the Bureau should not exempt any products or services 
covered by the proposal that are subject to the CFTC's jurisdiction 
because CFTC arbitration rules are limited and ineffective, do not 
guarantee the option for participation in class actions, and do not 
provide for the transparency of arbitral awards. This commenter did not 
identify, however, any consumer financial products or services provided 
by CFTC-regulated entities.
    An association of lawyers who represent investors also urged the 
Bureau to not exempt investment advisers providing a covered product or 
service because there is currently no regulation of the use of 
arbitration agreements related to these products or services by 
investment advisers, and the SEC, in its view, has no current plan to 
exercise its authority to regulate investment adviser arbitration 
agreements under Dodd-Frank section 921. This commenter did not 
identify, however, any consumer financial products or services provided 
by investment advisers.
The Final Rule
    The Bureau adopts Sec.  1040.3(b)(1)(i), an exemption for persons 
regulated by the SEC as defined in Dodd-Frank section 1002(21), which 
includes broker-dealers and investment advisers, as well as their 
employees, agents, and contractors, to the extent regulated by the SEC. 
This exemption also applies to persons acting in other SEC-regulated 
capacities as defined in Dodd-Frank section 1002(21), such as stock

[[Page 33350]]

exchanges, self-regulatory organizations, and others. Under Dodd-Frank 
section 1002(21), persons regulated by the SEC can only meet this 
definition ``to the extent'' that they are acting in an SEC-regulated 
capacity.\983\ Thus, it is not placing a condition on the exemption, 
such as the condition it had in the proposal for the broker-dealer 
exemption. The Bureau finalizes the exemption as described given that 
the SEC has authorities to regulate the use of arbitration agreements 
by SEC-regulated persons, including Dodd-Frank Act section 921 in which 
Congress delegated authority to the SEC to engage in its own rulemaking 
concerning the use of arbitration agreements by broker-dealers and 
investment advisers.\984\ In light of the fact that the Bureau has not 
received comments indicating that any other SEC-regulated persons 
provide consumer financial products or services that would otherwise be 
covered by proposed Sec.  1040.3(a), the Bureau has concluded, based on 
further consideration, that incidental provision of a consumer 
financial product or service performed by a person when acting in an 
SEC-regulated capacity should not be covered, just as the Bureau does 
not seek generally to regulate merchants or employers in this rule, as 
discussed in the section-by-section analysis for Sec.  
1040.3(a)(1)(iii) above and Sec.  1040.3(b)(5) below, respectively. 
Moreover, an exclusion for SEC-regulated persons is consistent with the 
rule's exclusion of CFTC-regulated persons, as described below. For 
clarity, in light of the above factors, the Bureau believes that when a 
person is acting in an SEC-regulated capacity as described in Dodd-
Frank section 1002(21), the final rule does not need to apply to them.
---------------------------------------------------------------------------

    \983\ 12 U.S.C. 5481(21) (clarifying that definition applies 
``only to the extent that any person described in any of 
subparagraphs (A) through (K), or the employee, agent, or contractor 
of such person, acts in a regulated capacity.'').
    \984\ For example, the Bureau recognizes that the FINRA rules 
described above already apply to broker-dealers and that the SEC 
could issue further regulations on this subject under the Dodd-Frank 
Act.
---------------------------------------------------------------------------

    In addition, the exemption in Sec.  1040.3(b)(1)(ii) applies to any 
person to the extent regulated by a State securities commission as a 
broker-dealer or investment adviser. For example, some smaller 
investment advisers have assets under management that fall below 
registration thresholds for SEC oversight but that are required to 
register in the States in which they operate. Similarly, some broker-
dealers operating exclusively within a State or only with respect to 
excluded and exempted securities may not be required to register with 
the SEC but may be regulated by a State securities commission. The 
Bureau has decided not to apply the rule only to smaller investment 
advisers or broker-dealers not registered with the SEC, as it sees no 
reason to target only this one segment of the market for coverage in 
this rule and doing so may create confusion in the marketplace. The 
exclusion in Sec.  1040.3(b)(1)(ii) does not reach more broadly than 
broker-dealers and investment advisers, however. The Bureau does not 
confer a blanket exemption on persons regulated by State securities 
commissions because unlike the term person-regulated by the SEC, there 
is no definition of this term in the Dodd-Frank Act. In some States, an 
agency that is a State securities commission regulates securities firms 
as well as banks and other providers that regularly provide consumer 
financial products or services.\985\ A blanket exclusion could 
therefore inadvertently exclude State-regulated banks.
---------------------------------------------------------------------------

    \985\ For example, in the District of Columbia, one agency--the 
Department of Insurance, Securities and Banking--regulates both 
banks and securities.
---------------------------------------------------------------------------

    Thus, as revised, this exclusion applies to a broker-dealer or 
investment adviser who falls into either or both of the following 
categories: (1) Is a person regulated by the SEC as defined in Dodd-
Frank section 1002(21); or (2) to the extent the person is regulated by 
a State securities commission as described in Dodd-Frank section 
1027(h). It also applies to any other person regulated by the SEC as 
defined in Dodd-Frank section 1002(21).
    With respect to persons regulated by the CFTC, the Bureau is 
similarly adding an exemption in the final rule to exclude persons 
regulated by the CFTC as defined in 12 U.S.C. 5481(20) or a person with 
respect to any account, contract, agreement, or transaction to the 
extent subject to the jurisdiction of the Commodity Futures Trading 
Commission under the CEA, 7 U.S.C. 1 et seq. The Bureau recognizes that 
the CFTC has authority to issue arbitration rules for persons regulated 
by the CFTC, as demonstrated by the CFTC arbitration rules discussed 
above, which have been in place for over four decades.\986\ In addition 
to excluding a person regulated by the CFTC as that term is defined in 
Dodd-Frank section 1002(20), the exemption separately applies to 
accounts, contracts, agreements, and transactions subject to CFTC 
jurisdiction under the CEA. The Bureau understands such activities 
generally would be carried out by persons registered or required to 
register with the CFTC, who therefore already would meet the definition 
of a person regulated by the CFTC in 12 U.S.C. 5481(20). Nonetheless, 
for the sake of clarity, the Bureau is separately referring to those 
activities as being excluded. Finally, both the definition of a person 
regulated by the CFTC in the Dodd-Frank Act and the additional 
reference to the exclusion CFTC-regulated accounts, contracts, 
agreements, and transactions only apply to the extent an activity is 
regulated by the CFTC under the CEA.\987\
---------------------------------------------------------------------------

    \986\ 17 CFR 166.5, originally adopted by 41 FR 42942 (Sept. 29, 
1976).
    \987\ See 15 U.S.C. 5481(20) (defining the term ``person 
regulated by the [CFTC]'' as referring to a person registered or 
required to register with the CFTC ``but only to the extent that the 
activities of such person are subject to the jurisdiction of the 
[CFTC] under the [CEA].'').
---------------------------------------------------------------------------

3(b)(2)

The Bureau's Proposal
    Proposed Sec.  1040.3(b)(2) would have excluded from the coverage 
of proposed part 1040 governments and their affiliates, as defined by 
12 U.S.C. 5481(1), to the extent such entities provide products and 
services directly to consumers within their jurisdiction as specified 
in proposed Sec.  1040.3(b)(2)(i) or (ii). This proposed exclusion 
would not have applied 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.\988\
---------------------------------------------------------------------------

    \988\ 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).
---------------------------------------------------------------------------

    As stated in the proposal, the Bureau believed that private 
enforcement of consumer protection laws, when provided for by statute, 
is an important companion to regulation, supervision of, and 
enforcement against private providers by governments at the local, 
State, and Federal levels. The Bureau believed, 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 that they and their affiliates provide directly to their 
own constituents.
    Specifically, proposed Sec.  1040.3(b)(2)(i) would have excluded 
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

[[Page 33351]]

Sec.  1040.3(b)(2)(i) would have applied, the Bureau posited that the 
Federal government and its affiliates may be uniquely accountable 
through the democratic process to consumers to whom the Federal 
government and its affiliates directly provide products and services. 
The Bureau additionally posited 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 proposed 
to exempt from coverage of part 1040 products and services provided 
directly by the Federal government 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 have exempted nongovernmental entities that 
provide covered products or services on behalf of the Federal 
government or its affiliates, such as student loan servicers. Proposed 
comment 3(b)(2)-1 would have reiterated this point with respect to the 
exclusions in proposed Sec.  1040.3(b)(2), and also would have noted 
that the definition of affiliate in Dodd-Frank section 1002(1) would 
have applied to the use of the term in proposed Sec.  1040.3(b)(2).
    Proposed Sec.  1040.3(b)(2)(ii) would have excluded 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 believed 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 have 
applied, the Bureau posited that governments and their affiliates may 
be 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 posited 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 proposed 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.
    As with the proposed exclusion for the Federal government and its 
affiliates, proposed Sec.  1040.3(b)(2)(ii) would not have excluded 
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, local, or Tribal government. This proposed exemption also would 
not have extended to State, local, or Tribal governments or their 
affiliates providing products or services to consumers who reside 
outside the territorial jurisdiction of the particular government. The 
Bureau believed 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.
    Proposed comment 1040.3(b)(2)-2 would have provided 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, as 
well as products and services that would have fallen outside the scope 
of the proposed exclusion. The use of the term ``affiliated'' in these 
examples also would have indicated that this exemption would not have 
applied to services provided by persons who are not affiliates of 
governments. For example, so-called ``public utilities'' would not have 
been exempt unless they control, are controlled by, or are under common 
control with a government or its affiliates. The Bureau requested 
comment on these proposed examples, and on whether other examples 
should be included.
    The Bureau further noted that the proposal would not have covered 
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 have been 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) generally would have applied.
Comments Received
    A consumer advocate and two public-interest consumer lawyer 
commenters urged the Bureau not to adopt the proposed exclusions, 
asserting that democratic processes are insufficient to protect 
consumers. In particular, they noted that consumers are not necessarily 
aware of legal harms (as the Bureau had itself noted in the proposal), 
and thus may be unable to use the democratic process to hold government 
providers to account. Moreover, even when consumers are aware, the 
commenters asserted that very few are likely to exercise their vote on 
this basis alone, particularly over small-dollar harms. The commenters 
also cited examples of the use of class actions to protect the rights 
of minorities, who, in their view, have historically faced particular 
difficulties holding governments accountable.\989\
---------------------------------------------------------------------------

    \989\ These commenters also referred to particular products or 
services that may be provided by governments. One commenter 
identified an arbitration agreement in a particular home-improvement 
financing contract used in a PACE (Property Assessed Clean Energy) 
home improvement financing program, as part of a program that, in 
the view of the commenter, has led to problems for many consumers. 
(The Bureau understands that PACE financing is typically supported 
by local governments and structured to be paid off through the local 
government tax assessment process.) In addition, another public-
interest consumer lawyer commenter expressed concern over the 
government exemption to the extent it would exclude debt collection 
by State schools, which, in its view, might add arbitration 
agreements in the future.
---------------------------------------------------------------------------

    These commenters separately urged the Bureau not to use the term 
``affiliate'' as defined in Dodd-Frank Act section 1002(1) because that 
definition was developed for the private marketplace and would be 
ambiguous in this context. One of these commenters also stated that 
affiliates of governments often have weaker accountability than 
governments themselves. Instead, the commenters advocated using a more 
developed test applied by the Internal Revenue Service to determine 
when entities are governmental in nature such

[[Page 33352]]

that they are not required to file a Federal tax return.\990\ The 
consumer advocate commenter also stated that the Bureau should not use 
the term ``arm of the State'' to define which entities are exempt 
because the application of that term from constitutional immunity law 
is uncertain, and could lead to the exemption of entities who have only 
a small amount of capital contribution from governments. Similarly, a 
public-interest consumer lawyer commenter also stated that the term 
affiliate in the Dodd-Frank Act should not be used because it was 
ambiguous, and could reach providers acting as a special counsel to 
prosecutors in connection with check collection.
---------------------------------------------------------------------------

    \990\ See I.R.S. Rev. Proc. 1995-48.
---------------------------------------------------------------------------

    As is discussed above in Part IV, the Bureau held a consultation 
with representatives of Tribal governments in Phoenix, Arizona, on 
August 22, 2016. Many Tribal government representatives attending the 
consultation and other Tribal commenters (for convenience, both are 
referred to here as Tribal commenters, as many of those providing oral 
input at the consultation also provided written comments) emphasized 
that, in their view, the proposal would interfere with the sovereign 
immunity of Tribal governments.\991\ Many Tribal commenters also 
expressed their opinion that the Bureau had no legal authority to 
regulate Tribal governments for several reasons, including that the 
reference to regulation of ``persons'' in the statute, 12 U.S.C. 
1002(19), did not specifically list Tribal governments. In addition, 
many of these commenters criticized the Bureau because it did not 
propose to exempt Tribal governments entirely or otherwise state that 
the proposal would not apply to them.
---------------------------------------------------------------------------

    \991\ These commenters' disagreement with the class proposal are 
addressed in Part VI above.
---------------------------------------------------------------------------

    In particular, Tribal commenters criticized proposed Sec.  
1040.3(b)(2). With regard to the Bureau's focus on democratic 
accountability, a number of Tribal commenters stated that their 
governments are sufficiently accountable, whether to residents or non-
residents, and that they should be completely exempted from the rule. 
One Tribal commenter stated that the lack of a similar exemption in the 
Bureau's proposed rulemaking for small-dollar loans raised questions 
about the Bureau's rationale for proposing one here.\992\ Several 
Tribal commenters also suggested in their comments that other 
mechanisms, such as intergovernmental relations with consumer 
protection regulators (including the Bureau), were a much stronger 
guarantor of accountability for consumer protection matters, whereas, 
in their view, the Bureau has not established that democratic 
accountability is an adequate form of accountability for consumer 
protection purposes. A Tribal industry trade association stated that 
the exclusion should be broadened to apply to all Tribal governments, 
including arms of Tribal governments, that are subject to Tribal 
regulatory oversight and dispute resolution mechanisms codified in 
Tribal law. In the view of this commenter, the Bureau did not find that 
class actions were in the public interest and for the protection of 
consumers in these contexts. In addition, several Tribal commenters 
noted that the proposal's concept of residency could be difficult to 
apply to all Tribes. Commenters explained that many Tribes may have 
members that do not reside on Tribal lands, whether because the Tribe 
has little or no land or because the Tribal members reside elsewhere 
(and thus these Tribes would not be able to qualify for the exception 
even when dealing with their own members), while others may have 
complicated interpretations of what land is considered their territory 
(and thus who are their residents).
---------------------------------------------------------------------------

    \992\ See generally Payday, Vehicle Title, and Certain High-Cost 
Installment Loans, 81 FR 47864 (July 22, 2016).
---------------------------------------------------------------------------

    Several Tribal commenters also stated that the proposal would 
interfere with Supreme Court and other appellate precedent recognizing 
that consumers who are not members of a Tribe and not resident in 
Tribal territory nonetheless can consent to Tribal jurisdiction.\993\
---------------------------------------------------------------------------

    \993\ See, e.g., Montana v. United States, 450 U.S. 544, 565 
(1981) (holding that a Tribe may regulate dealings with nonmembers 
based on consent); Dollar Gen. Corp. v. Mississippi Band of Choctaw 
Indians, 746 F.3d 167, 177 (5th Cir. 2014) (applying Montana 
consent-based test), aff'd per curiam, 579 U.S. ___, 136 S.Ct. 2159 
(2016).
---------------------------------------------------------------------------

    Several Tribal commenters further asserted that there was no basis 
for applying the proposal to Tribal governments, since they have 
sovereign immunity from private lawsuits including class actions.\994\ 
One Tribal commenter also stated that Tribal governments may need to 
spend significant funds, and that based on its experience litigating 
immunity issues in a recent class action, those could be in excess of 
$100,000 per case. This commenter suggested that arbitration agreements 
may reduce this cost, though this commenter also stated that its Tribal 
lending operation did not use arbitration agreements.
---------------------------------------------------------------------------

    \994\ Some of the comments cited authority, including C&L 
Enterprises, Inc. v. Citizen Bandpotawatomi Tribe of Okla., 532 U.S. 
411 (2001).
---------------------------------------------------------------------------

    Finally, two Tribal commenters urged the Bureau to expand its 
proposed exemption to include a service provider that acts on behalf of 
a government, asserting that these service providers enjoy the same 
legal status as the government itself. In support of their position, 
these commenters asserted that contractors may manage Tribal casinos 
without violating Federal gambling law, and contractors that run 
lotteries on behalf of State governments enjoy the same immunities that 
are conferred on the State government itself.\995\
---------------------------------------------------------------------------

    \995\ Many Tribal commenters also objected to the language in 
Bureau's proposed mandatory provision for arbitration agreements. 
Those comments are discussed in the section-by-section analysis of 
Sec.  1040.4(a)(2) below.
---------------------------------------------------------------------------

The Final Rule
    After consideration of the comments and the Bureau's further 
analyses, the Bureau has decided to shift away from an exemption for 
governments based on where their consumers reside, as the Bureau had 
proposed. The Bureau also understands the concerns raised by commenters 
about democratic accountability being potentially insufficient to 
protect consumers in some situations. At the same time, the Bureau also 
does not see a need, in general, for the rule to apply to persons who 
cannot be sued in class actions in any event because they are immune 
from suit. The Bureau is therefore adopting a status-based exemption in 
Sec.  1040.3(b)(2) for (i) Federal government agencies as defined in 
the Federal Tort Claims Act, 28 U.S.C. 2671, and (ii) any State, Tribe, 
or other person to the extent the person qualifies as an arm of the 
State or Tribe within the meaning of Federal law concerning sovereign 
immunity and the person's immunities have not been abrogated by the 
U.S. Congress. The Bureau is adding comment 3(b)(2)(ii)-1 to clarify 
that, when the rule uses the term State, this includes any State, 
territory, or possession of the United States, the District of 
Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the 
Northern Mariana Islands, Guam, American Samoa, and the United States 
Virgin Islands.\996\ The Bureau also is adding comment 
1040.3(b)(2)(ii)-2 to clarify that the term ``Tribe'' in this exemption 
is a reference to any federally recognized Indian Tribe, as defined by 
the Secretary of the Interior under section 104(a) of the

[[Page 33353]]

Federally Recognized Indian Tribe List Act of 1994, 25 U.S.C. 479a-
1(a).\997\
---------------------------------------------------------------------------

    \996\ This definition mirrors the definition of State in Dodd-
Frank section 1002(27), except, however, for purposes of this rule 
the Bureau is separately using the term ``Tribe'' for clarity, given 
that the rule also separately refers to the arm of the State and arm 
of the Tribe immunity law standards.
    \997\ This definition repeats the definition used in Dodd-Frank 
section 1002(27). These are the Tribal entities recognized and 
eligible for funding and services from the Bureau of Indian Affairs 
(BIA) of the U.S. Department of Interior by virtue of their status 
as Indian Tribes. See, e.g., Indian Entities Recognized and Eligible 
to Receive Services from the United States Bureau of Indian Affairs, 
81 FR 5019 (Jan. 29, 2016).
---------------------------------------------------------------------------

    The Bureau recognizes that certain government actors generally 
enjoy blanket immunities from private suit except when the immunity is 
lawfully abrogated by an act of Congress. These actors include not only 
States and Tribes, but also entities that are determined to be an ``arm 
of a State,'' and similarly, an arm of a Tribe.\998\ The Federal 
government, including its agencies, also generally enjoys immunity from 
private suit, again unless waived by Congress for particular Federal 
law claims.\999\ The Bureau does not believe it is necessary for the 
rule to apply to persons who cannot be sued on any claims in a private 
lawsuit because they enjoy sovereign immunity and that immunity has not 
been abrogated. The Bureau believes that, in part because of their 
general immunities, such entities do not tend to use arbitration 
agreements in the first instance.\1000\ Accordingly, the Bureau is 
adopting in Sec.  1040.3(b)(2) exemptions for these persons. With 
respect to the consumer advocate commenter that stated that an 
exemption based on an arm of a State or an arm of a Tribe could lead to 
the exclusion of entities that have only a small amount of capital 
contribution from governments, the Bureau does not believe that would 
be a reason to subject such persons to the rule when they would be 
immune from private suit anyway. To the extent the reduced capital 
contribution raises a genuine belief about whether the person truly is 
an arm of the State or an arm of a Tribe, the person may insert the 
optional language in Sec.  1040.4(a)(2)(vi).
---------------------------------------------------------------------------

    \998\ Alden v. Maine, 527 U.S. 706, 713 (1999) (State sovereign 
immunity); People ex. rel. Owen v. Miami Nation Enterprises, 2016 WL 
7407327 (Cal. 2016) (summarizing national jurisprudence on the ``arm 
of the Tribe'' doctrine).
    \999\ Glidden Co. v. Zdanok, 370 U.S. 530 (1962) (holding that 
Article III courts exercise jurisdiction over claims against the 
United States under jurisdiction conferred by Congress).
    \1000\ One Tribal entity commenter stated that the rule would 
have a number of effects on Tribal economic development including 
job growth. This commenter clarified, however, that it does not use 
arbitration agreements. As a result, it was unclear why the 
commenter foresaw this result. In any event, the exemption in Sec.  
1040.3(b)(2) should prevent any unintended consequences from the 
rule on Tribal governmental bodies that are immune from private suit 
as arms of a Tribe.
---------------------------------------------------------------------------

    Insofar as U.S. sovereign immunity law allows for the immunities of 
a State or Tribe (and by extension, their arms) to be, in some 
circumstances, abrogated by Congress, the Bureau does not intend for 
its rule to permit arbitration agreements to block class actions in 
these instances.\1001\ In those circumstances, an entity that may be a 
State, Tribe, or an arm of a State or Tribe, may be subject to private 
suit, including a class action. Therefore, the exemption adopted in 
Sec.  1040.3(b)(2) is not available to an entity to the extent its 
immunity has been abrogated by Congress.\1002\
---------------------------------------------------------------------------

    \1001\ C&L Enterprises, 532 U.S. 411, 418 (2001) (affirming that 
abrogation of Tribal immunities under U.S. law is a matter for 
Congress alone); Florida Prepaid Postsecondary Educ. Board v. 
College Svgs. Bank, 527 U.S. 627, 634 (1999) (limiting, but not 
abandoning, abrogation powers of Congress with respect to States).
    \1002\ With regard to the Tribal industry association 
commenter's request for an exemption for Tribal governments and arms 
of Tribal governments when subject to Tribal regulatory oversight 
and Tribal dispute resolution processes, the exemption the Bureau is 
adopting in Sec.  1040.3(b)(2) would apply to these persons when 
they are immune from private suit under Federal sovereign immunity 
law. To the extent these persons' immunity from private suit in non-
tribal courts is abrogated by Congress, the Bureau believes this 
rule should not restrict consumers' access to non-tribal courts in 
disputes with these persons.
---------------------------------------------------------------------------

    The Bureau also recognizes that the existence and nature of 
sovereign immunity from suit is not always fully certain. If a question 
or uncertainty were to arise, the final rule provides tailored language 
for entities to include in their contracts to preserve any immunity 
claims. Specifically, as discussed in the section-by-section analysis 
for Sec.  1040.4(a)(2)(vi) below, if a person has a genuine belief that 
sovereign immunity from private suit under applicable law may apply to 
a person that may seek to assert the pre-dispute arbitration agreement, 
the person may voluntarily include a specified provision in its 
arbitration agreement that is designed to preserve any claim to that 
immunity that the person may have. This option allows providers covered 
by the rule to deal with any uncertainty they may perceive concerning 
the status of their immunities, without taking the risk that a court 
ultimately would disagree with their reliance on the exemption in Sec.  
1040.3(b)(2), and potentially subjecting them to a risk of penalties 
for violation of this rule.
    The Bureau also recognizes that some governmental entities may not 
be eligible for the exemption in Sec.  1040.3(b)(2)(ii). For example, 
some local governments may not be an arm of the State in which they are 
located. These governments would be subject to the rule to the extent 
they use arbitration agreements in connection with offering or 
providing a covered product or service to consumers and no other 
exemption applies. The rulemaking record does not establish that such 
situations are common.\1003\ Alternatively, some entities may not be an 
arm of the State and may be subject to Federal law claims, but may be 
afforded a governmental status and associated immunities under State 
law. While those persons would not be eligible for the exemption in 
Sec.  1040.3(b)(2)(ii), they may still use immunity preserving language 
permitted by Sec.  1040.4(a)(2)(vi). Finally, the Bureau recognizes 
that some entities may be affiliated loosely with a State or Tribal 
government, but in a manner insufficient to create immunity from 
private suit. The Bureau does not believe that an exemption for these 
entities would be warranted. The Bureau thinks the case for an 
exemption is weakest under the logic of either the proposal or the 
final rule with regard to entities with such loose governmental 
relationships, and has concluded on balance that it would be beneficial 
to subject them to the final rule.
---------------------------------------------------------------------------

    \1003\ A consumer advocate identified an arbitration clause in 
one consumer agreement for a home improvement program funded through 
tax assessments. The commenter did not establish whether the 
agreement entails an extension of consumer credit under Regulation 
B, or whether the provider of the financing is an arm of the State, 
however. Whether such a program is covered will depend on the facts 
and circumstances, and the application of these legal standards.
---------------------------------------------------------------------------

    The Bureau further notes that the exemption in Sec.  
1040.3(b)(2)(ii) applies to an entity that qualifies as an arm of the 
State or arm of the Tribe under U.S. law, regardless of whether it has 
waived its immunity. Under sovereign immunity law, States, Tribes, or 
arms of a State or Tribe may become amenable to private suit by 
voluntarily consenting to private suit.\1004\ After substantial 
consideration, however, the Bureau believes that there would be undue 
complications with basing eligibility for the exemption in Sec.  
1040.3(b)(2)(ii) of this rule on whether an entity has voluntarily 
waived its immunities. First, if a State, Tribe, or other person that 
is an arm of the State or Tribe uses an arbitration agreement, this may 
establish a formal dispute mechanism where one did not otherwise 
exist--unlike for other providers, which are generally amenable to a 
suit in court absent an arbitration agreement. As a result, the Bureau 
is concerned that eliminating the exemption in the case of a waiver, 
such as may occur by use of an

[[Page 33354]]

arbitration agreement, could discourage all forms of dispute 
resolution. Second, issues of waiver--including the extent of any 
waiver--are often fact-dependent, and in some cases may only be 
resolved through litigation. For example, a State legislature may waive 
immunities of an arm of the State for certain State law purposes, but 
leave unresolved whether immunity from Federal law claims has been 
waived. Thus, conditioning the exemption on the absence of a voluntary 
waiver may create undue uncertainty. Accordingly, the Bureau is not 
conditioning the exemption on the absence of a voluntary waiver. An 
entity that is an arm of the State or Tribe whose attendant immunity 
from suit has not been abrogated by Congress is eligible for the 
exemption in Sec.  1040.3(b)(2)(ii), even if the entity is found to 
have voluntarily waived the immunities that flow from its status as an 
arm of the State or Tribe. Similarly, even if Tribal law allowed 
certain claims against an entity that was an arm of the Tribe under 
Federal law, if that entity's sovereign immunity from private suit 
under Federal law was not abrogated by Congress, then it would be 
eligible for the exemption as well. Through monitoring the provision of 
consumer financial products or services provided by governments, 
however, the Bureau could at a future point condition the exemption on 
the absence of a waiver of immunities.\1005\
---------------------------------------------------------------------------

    \1004\ See, e.g., College Svgs. Bank v. Florida Prepaid 
Postsecondary Educ. Board, 527 U.S. 666, 673 (1999) (describing 
voluntary waiver doctrine).
    \1005\ Although no commenters raised this concern, the Bureau 
also notes that it is in theory possible that a State law does not 
afford immunities to an entity that nonetheless has arm of the State 
status under Federal law and is immune from Federal law claims. This 
could occur, for example, because the entity is not treated as part 
of the State government for purposes of the State immunity law, or 
the immunity such an entity may typically enjoy under State law has 
been abrogated. The Bureau believes, however, that it would be rare 
for State law to allow for claims against a body so closely 
connected with the State that Federal law deems it is an arm of the 
State. The Bureau also believes it would be impractical to condition 
the exemption on an entity having immune status under both Federal 
and State law. This could often implicate complex questions under 
laws of multiple States and Federal law merely to determine 
eligibility for the exemption. Accordingly, the Bureau is adopting a 
simpler approach. If such an entity were an arm of the State under 
Federal law, then it would be eligible for the exemption in Sec.  
1040.3(b)(ii). The Bureau notes that if a similar scenario occurred 
in which a Tribal law does not afford immunities to a Tribal entity 
that nonetheless qualifies as an arm of the Tribe under U.S. Federal 
sovereign immunity law, the entity would, likewise, still be 
eligible for the exemption.
---------------------------------------------------------------------------

3(b)(3)
    The Bureau proposed 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 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.\1006\ 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 have been eligible for this proposed 
exemption and generally would have been required to comply with all 
applicable provisions of the proposal.
---------------------------------------------------------------------------

    \1006\ As proposed comment 3(b)(3)-1 would have clarified, 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).
---------------------------------------------------------------------------

    As stated in the proposal, the Bureau believed that a threshold of 
the type described above (based upon provision of a product or service 
to only 25 or fewer persons annually) may have been appropriate to 
exclude covered products and services from coverage when they are not 
offered or provided on a regular basis for several reasons.\1007\ 
First, the Bureau believed that services and products 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 provided so infrequently, the likelihood of an 
individual claim in arbitration also is especially low. Therefore, the 
Bureau believed that applying the proposal 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 believed that 
excluding covered products and services that entities provide so 
infrequently would relieve these entities of the burden of complying 
with the proposal for those products and services.
---------------------------------------------------------------------------

    \1007\ 81 FR 32830, 32882 (May 24, 2016).
---------------------------------------------------------------------------

    As also explained in the proposal, the Bureau was 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 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),\1008\ the underlying statutes and 
regulations incorporated by reference do not specify particular numeric 
thresholds.\1009\
---------------------------------------------------------------------------

    \1008\ 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 proposal 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.
    \1009\ 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 the proposal, the Bureau believed that a single 
uniform numerical threshold may facilitate compliance and reduce 
complexity, particularly given that application of the proposal 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 have 
been 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 
emphasized that it was proposing this uniform standard in the unique 
context of this proposal, and that it expected 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 noted that basing 
an exemption on the level of activity in the current and preceding 
calendar year would have been consistent with the threshold under 12 
CFR 1026.2(a)(17)(v).
    The Bureau received one comment on this proposed exemption from a 
consumer advocate that supported the proposed exemption as appropriate. 
In this commenter's opinion, the exemption would have minimal impact on 
consumers in light of the numerosity requirement for class actions. The 
commenter noted that the similar exemption in Regulation Z has been 
well understood and implemented.
    The final rule adopts Sec.  1040.3(b)(3) and comment 3(b)(3)-1 as 
proposed, with two minor clarifications. First, rather than framing the 
exemption as applying ``when'' the person provides products or services 
below the specified threshold frequency, the final rule states that the 
exemption applies ``with respect to'' the products or services provided 
below that frequency. This revision seeks to emphasize more

[[Page 33355]]

clearly that, if a person provides two products or services covered by 
Sec.  1040.3(a), one with a frequency that is below the threshold and 
the other with a frequency that exceeds the threshold, then the 
exemption only applies to the first product or service and not the 
second. Second, comment 3(b)(3)-1 is revised to clarify that although 
the number of times a product is offered is not relevant for purposes 
of determining eligibility for this exemption, participating in a 
credit decision with regard to consumer credit in circumstances 
described in Sec.  1040.3(a)(ii) would count. In particular, this 
activity constitutes providing a product or service covered by Sec.  
1040.3(a), even if an application for consumer credit is denied. The 
clarification in comment 3(b)(3)-1 is important to prevent confusion 
over what constitutes providing a covered product or service in the 
context of consumer credit, because the number of times a person and 
its affiliates offer a product or service is not relevant to 
eligibility for the exemption.\1010\
---------------------------------------------------------------------------

    \1010\ For example, a person and its affiliates collectively may 
offer a product or service to more than 25 consumers in a given 
calendar year, but only provide the product or service to 25 or 
fewer consumers in that calendar year and 25 or fewer consumers in 
the prior calendar year. In that example, the person would still be 
excluded by Sec.  1040.3(b)(3).
---------------------------------------------------------------------------

    The Bureau also adopts new comment 3(b)(3)-2 to clarify the 
obligations of a person providing a covered product or service upon 
becoming ineligible for the exemption. The Bureau notes that the 
exclusion in Sec.  1040.3(b)(3) is based on the frequency with which a 
person and its affiliates collectively ``provide'' a product or 
service. That standard is in the present tense so the exemption is 
available so long as the criteria in the exemption are met. 
Accordingly, comment 3(b)(3)-2 clarifies that, if, during a calendar 
year, a person to that point excluded by Sec.  1040.3(b)(3) for a given 
product or service described in Sec.  1040.3(a) provides that product 
or service to a 26th consumer, then that person ceases to be eligible 
for this exclusion at that point in time with respect to that product 
or service. The provider must begin complying with this part with 
respect to the covered product or service provided to that 26th 
consumer. In addition, the provider will not be eligible for the 
exclusion in Sec.  1040.3(b)(3) whenever it offers or provides that 
product or service for the remainder of that calendar year and the 
following calendar year.
3(b)(4)
The Bureau's Proposal
    As stated in the proposal, merchants, retailers, and other sellers 
of nonfinancial goods and services extending consumer credit are 
excluded from the Bureau's rulemaking authority except in certain 
limited circumstances under Dodd-Frank section 1027(a)(2)(B). Thus, 
while they are covered persons under the Dodd-Frank section 1002(6), 
the proposal would have applied to them generally only when they act as 
creditors as defined by Regulation B by extending consumer credit or 
participating in consumer credit decisions, or when they engage in 
collection on or sale of these consumer credit accounts beyond the 
scope of the exclusion in Dodd-Frank section 1027(a)(2). In particular, 
because section 1027(a)(2)(A) generally excludes activities by a 
merchant, retailer, or other seller of nonfinancial goods or services 
to the extent such person extends credit directly to a consumer 
exclusively for the purchase of a nonfinancial good or service directly 
from that person, the Bureau proposed to reflect that general 
restriction through language excluding merchants in Sec.  1040.3(b)(5) 
as discussed further below.
    The Bureau also proposed in Sec.  1040.3(b)(4) to exclude merchants 
from the scope of the rule for an additional type of activity that is 
generally not excluded from Bureau jurisdiction under section 
1027(a)(2). Specifically, proposed Sec.  1040.3(b)(4) would have 
excluded merchants to the extent they are engaged in certain 
``factoring'' transactions and other types of commercial credit in 
which the merchant collateralizes its interest in its own consumer 
credit receivables on which no finance charge is imposed. See Dodd-
Frank section 1027(a)(2)(B)(i). As explained in further detail in the 
proposal, the Bureau would have limited the exemption in Sec.  
1040.3(b)(4) to circumstances where the Bureau would not have other 
bases for jurisdiction, such as under other parts of Dodd-Frank section 
1027(a)(2) that subject certain types of credit transactions by 
merchants to the rulemaking authority of the Bureau.\1011\
---------------------------------------------------------------------------

    \1011\ 81 FR 32830, 32883-84 (May 24, 2016).
---------------------------------------------------------------------------

    Proposed Sec.  1040.3(b)(4)(i) thus would have excluded from the 
coverage of 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 have been 
eligible for this exemption with respect to such consumer credit 
transactions when they are sold, assigned, or otherwise conveyed to a 
third party, so long as the consumer credit was not extended in an 
amount that significantly exceeded the value of the good or service 
(which creates a basis for rulemaking authority under section 
1027(a)(2)(B)(ii)) and did not have a finance charge (which creates a 
basis for rulemaking authority under section 1027(a)(2)(B)(iii) except 
where the creditor is not engaged significantly in that type of lending 
under section 1027(a)(2)(C)(i)).
    In addition, the exclusion in proposed Sec.  1040.3(b)(4)(ii) would 
have applied 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 
proposal would not have applied, 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)).
    Further, the Bureau noted that proposed Sec.  1040.3(b)(4) would 
only have exempted a merchant, retailer, or seller of the nonfinancial 
good or service, but would not have affected 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 comments 4-1 and 4-2, those 
providers would have been subject to the proposal.
Comments Received
    A public-interest consumer lawyer commenter opposed the proposed 
exemption in Sec.  1040.3(b)(4) but did not elaborate on the basis for 
its opposition. A consumer advocate commenter was not opposed to the 
exemption in proposed Sec.  1040.3(b)(4), stating that some merchant 
financing arrangements may expose the merchant to risks, but

[[Page 33356]]

that these risks generally should not filter down to consumers. This 
commenter also supported the view that the Bureau expressed in the 
proposal that only the merchant itself would be eligible for the 
exemption, and not third parties such as payment processors, servicers, 
or debt collectors. This commenter urged the Bureau to memorialize this 
point in the commentary to the final rule.
    An industry trade association expressed concern that the scope of 
the exemption in proposed Sec.  1040.3(b)(4)(i) would be confusing and 
difficult to analyze for merchants extending consumer credit with no 
finance charge. This commenter stated that the Bureau should clarify 
that any merchant extending consumer credit would be exempt from the 
rule except where extending consumer credit with a finance charge or in 
an amount that significantly exceeded the value of the nonfinancial 
good or service being financed. The commenter also stated that the 
merchant should be excluded, unless the basis for covering the merchant 
was established by ``clear and convincing evidence.'' Finally, the 
commenter stated that the exemption in proposed Sec.  1040.3(b)(4)(ii) 
should not be limited to the act of acquiring or purchasing the 
extension of consumer credit, but should also include the activities 
carried out with respect to that account that would have been exempt 
had they been performed by the selling merchant, such as servicing. 
Otherwise, in its view, the purchasing or acquiring merchant would be 
more limited in what it could do without triggering the rule than the 
original merchant would be--without any basis for that differential 
treatment.
The Final Rule
    The final rule adopts Sec.  1040.3(b)(4) as proposed, with 
technical changes to refer to the excluded person in the singular 
instead of plural and to refer to the activity of offering as 
excluded,\1012\ as well as an additional clarification. In particular, 
in addition to excluding merchants under the circumstances addressed in 
proposed Sec.  1040.3(b)(4), the Bureau has added a new subparagraph 
(A) to extend the exclusion also to apply to circumstances in which the 
merchant is not subject to Bureau rulemaking authority under any 
component of Dodd-Frank section 1027(a)(2). While both proposed and 
final Sec.  1040.3(b)(5) (renumbered as Sec.  1040.3(b)(6)) achieve 
this same effect because they generally exclude parties who are not 
subject to the Bureau's rulemaking authority, the Bureau believes that 
including this second element in Sec.  1040.3(b)(4) will help to reduce 
confusion about whether merchants extending consumer credit with no 
finance charge would be subject to the rule. Given that proposed Sec.  
1040.3(b)(4) already incorporated certain elements of section 
1027(a)(2) of the statute, the Bureau believes that, based on the 
industry trade association comment described above, it would be clearer 
if this provision also refers to the circumstances where a statutory 
exclusion in section 1027(a)(2) would apply to the merchant.
---------------------------------------------------------------------------

    \1012\ The header of Dodd-Frank section 1027(a)(2) indicates 
that statutory provision relates to ``offering or provision'' of 
certain consumer financial products. For clarity, the Bureau is 
similarly revising the scope of the exclusion in Sec.  1040.3(b)(4).
---------------------------------------------------------------------------

    Therefore, in light of the addition of subparagraph (A) to Sec.  
1040.3(b)(4)(i) to refer to circumstances--i.e., circumstances in which 
the Bureau does not have rulemaking authority under Dodd-Frank section 
1027(a)(2)(B), the Bureau has moved the other references to provisions 
of section 1027(a)(2)(B) that appeared in the proposal to a new 
subparagraph (B) of Sec.  1040.3(b)(4)(i). As a result, merchants 
extending consumer credit with no finance charge would know that, even 
if they were not eligible for the exemption in Sec.  1040.3(b)(4)(i) as 
proposed, they may still be excluded from coverage of the rule. 
However, the Bureau disagrees with the commenter that merchants 
extending consumer credit with a finance charge, or in an amount that 
significantly exceeds the value of the nonfinancial goods or services 
being financed, should only be covered if these circumstances are 
established with ``clear and convincing evidence.'' Such an approach 
would set a higher standard for applying the Bureau's rule than for 
underlying statutes whose compliance the Bureau is seeking to ensure. 
For example, if a TILA claim were asserted against a merchant extending 
consumer credit on the basis of a finance charge being present, such a 
claim would not necessarily be subject to a ``clear and convincing 
evidence'' standard. Setting such a standard for the scope of the rule 
would therefore reduce consumer protections the rule is seeking to 
enhance.
    The Bureau is also adding comment 3(b)(4)-1 to clarify that the 
exemption in Sec.  1040.3(b)(4)(ii) applies not only to the purchase or 
acquisition itself, but also to any servicing or collection by the 
merchant purchaser or acquirer.
    The Bureau also reaffirms the statement that it made in the 
proposal concerning the ineligibility of third parties for the 
statutory exclusion in Dodd-Frank section 1027(a)(2).
3(b)(5) and (b)(6)
The Bureau's Proposal
    The proposal would not have applied 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 
proposed to make this limitation an explicit exemption in proposed 
Sec.  1040.3(b)(5). Proposed Sec.  1040.3(b)(5) thus would have 
clarified that part 1040 would not have applied 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).
    As the Bureau noted in the proposal, the Bureau had intended that 
proposed Sec.  1040.3(b)(5) would only restrict application of proposed 
Sec.  1040.4 with regard to those parties for which the Bureau's 
authority is constrained by Dodd-Frank sections 1027 and 1029. 
Accordingly, while merchants and automobile dealers who are not subject 
to the Bureau's rulemaking authority due to sections 1027 and 1029 
would not have been subject to proposed Sec.  1040.4, the Bureau 
explained that it has Dodd-Frank section 1028 rulemaking authority over 
other providers who assume or seek to use arbitration agreements 
entered into by such merchants or automobile dealers. Notably, entities 
excluded from Bureau rulemaking authority under Dodd-Frank sections 
1027 and 1029 may still be covered persons as defined by Dodd-Frank 
section 1002(6). Thus, the Bureau stated that 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 have applied 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 have been 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) described above, for example, hospitals, doctors, and 
other service providers extending incidental

[[Page 33357]]

ECOA credit would not have been 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 
have applied 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 
automobile dealer is excluded from Bureau rulemaking authority under 
Dodd-Frank section 1029.
Comments Received
    A consumer advocate stated in its comments that the final rule 
should clarify that the rule applies to buy-here-pay-here automobile 
lenders, which this commenter described as dealers who provide their 
own financing to consumers and require the consumers to return to the 
lot to make payments. This commenter believed that this clarification 
would help address what, in its view, was a general misimpression held 
by some in the marketplace that the Bureau did not regulate buy-here-
pay-here automobile lenders.
    An industry trade association for automobile dealers stated in its 
comment that, in its view, proposed Sec.  1040.3(b)(5) would be 
inadequate to truly exempt automobile dealers from the rulemaking and 
instead that the proposal would conflict with the exclusion in Dodd-
Frank section 1029 for certain automobile dealers. The commenter 
focused specifically on the proposed requirement in Sec.  1040.4(a)(2) 
that providers include in their pre-dispute arbitration agreements 
mandatory language explaining that the provisions would not prohibit 
consumers from participating in class actions. Although proposed Sec.  
1040.3(b)(5) would have excluded many automobile dealers from this 
requirement, the commenter argued that the rule would still effectively 
require automobile dealers making loans that are assigned to 
unaffiliated third parties to include the mandatory contract provisions 
that the unaffiliated third parties would be required to have under the 
rule. This commenter asserted that automobile dealers are generally 
required to use the forms created by indirect automobile finance 
companies. Because indirect lenders would be required to use the 
Bureau's contract provision, the commenter predicted that they would 
require as a matter of contract that the dealers include that provision 
on their standard forms, rather than satisfying the rule either by 
sending consumers notice of the restriction on use of pre-dispute 
arbitration agreements or amending the agreement at the time that the 
indirect lenders acquire the loan contracts.
    In addition, an industry commenter sought an express exemption 
providing that the rule would not apply to employer compensation 
agreements that relate to consumer financial products and services for 
employees, for example, employer-provided assistance with the down 
payment for a home. The commenter asserted that Dodd-Frank section 
1027(g) excluded any employee benefit or compensation plan or 
arrangement from Bureau rulemaking authority, and expressed concern 
that even if some employer-provided consumer financial products or 
services were covered by the rule, the rule should not reach broader 
employment agreements concerning other aspects of the employment 
relationship. The commenter suggested that an exclusion for employer-
provided products and services also would be consistent with the 
Bureau's decision not to propose covering consumer reports provided by 
employers under proposed Sec.  1040.3(a)(4). On the other hand, a 
consumer advocate commenter expressed concerns about certain practices 
by employers, such as compelled use of a payroll card account, in 
violation of Regulation E.\1013\
---------------------------------------------------------------------------

    \1013\ See also Bureau of Consumer Fin. Prot., ``Payroll Card 
Accounts (Regulation E),'' CFPB Bulletin No. 2013-10 (Sept. 12, 
2013), available at http://files.consumerfinance.gov/f/201309_cfpb_payroll-card-bulletin.pdf.
---------------------------------------------------------------------------

The Final Rule
    The Bureau has considered the comments and is adopting proposed 
Sec.  1040.3(b)(5) with minor technical changes for clarity,\1014\ 
renumbering it as Sec.  1040.3(b)(6), and creating a new Sec.  
1040.3(b)(5) to provide an exemption for employer-provided products and 
services as described further below.
---------------------------------------------------------------------------

    \1014\ Proposed Sec.  1040.3(b)(5) referred to an exclusion for 
persons and their products or services to the extent ``limitations'' 
in Dodd-Frank sections 1027 or 1029 ``apply.'' Exclusions from the 
rulemaking authority of the Bureau, such as exclusions for 
automobile dealers in certain circumstances, are the type of 
exclusions that are relevant to this rulemaking. The Bureau is 
therefore clarifying that Sec.  1040.3(b)(6) excludes persons to the 
extent providing products or services in circumstances that are 
excluded from the rulemaking authority of the Bureau.
---------------------------------------------------------------------------

    As the Bureau had explained in the proposal, automobile dealers 
extending consumer credit that is assigned to unaffiliated third 
parties are generally excluded from the rulemaking authority of the 
Bureau in the circumstances described in Dodd-Frank section 1029. These 
automobile dealers are not subject to this rule, as reaffirmed by the 
explicit reference to section 1029 in Sec.  1040.3(b)(6), and would 
thus not be obligated to include in their consumer contracts the 
provisions mandated in the rule. The class rule also would not require 
indirect automobile finance companies to mandate that automobile 
dealers with whom they work use contracts with consumers that include 
the provisions mandated in the rule. Rather, the indirect automobile 
finance company could amend the contract to include the mandated 
provisions or send the consumer a notice about the rule at the time the 
company purchases the credit.\1015\ The Bureau therefore disagrees with 
the commenter's suggestion that the rule would conflict with Dodd-Frank 
section 1029.
---------------------------------------------------------------------------

    \1015\ See Sec.  1040.4(a)(2)(iii).
---------------------------------------------------------------------------

    At the same time, the Bureau acknowledges the possibility that, as 
a business decision and of their own volition, indirect automobile 
finance lenders may include an arbitration provision consistent with 
the rule in a form contract they provide to the automobile dealer to 
use with the consumer. However, even if this were to occur, as 
discussed below in connection with Sec.  1040.4(a)(2)(iii)(A), these 
lenders would be free to include in their contracts language to clarify 
that the rule would not apply to the dealers (to the extent that the 
dealers are excluded from Bureau rulemaking authority by Dodd-Frank 
section 1029).
    The Bureau does not believe it is necessary in this rule, in either 
regulation text or commentary, to provide interpretations of the scope 
of provisions in Dodd-Frank sections 1027 or 1029. With regard to buy-
here-pay-here automobile lenders, the Bureau did receive a number of 
comments on behalf of automobile lenders or automobile dealers, and 
none suggested the type of confusion that the consumer advocate 
commenter suggested may exist. The Bureau does not believe it is 
necessary to restate the statute in this rule.\1016\
---------------------------------------------------------------------------

    \1016\ See, e.g., Press Release, Bureau of Consumer Fin. Prot., 
``CFPB Takes First Action Against `Buy-Here Pay-Here' Auto Dealer,'' 
(Nov. 19, 2014), available at http://www.consumerfinance.gov/about-us/newsroom/cfpb-takes-first-action-against-buy-here-pay-here-auto-dealer/.
---------------------------------------------------------------------------

    With regard to the industry commenter concerned with potential 
coverage of employers under the rule, the Bureau notes that Dodd-Frank 
section 1027(g) generally excludes Bureau rulemaking authority over 
consumer financial products or services that relate to a ``specified 
plan or arrangement.'' \1017\ Whether a consumer

[[Page 33358]]

financial product or service covered by Sec.  1040.3(a) would be 
excluded pursuant to section 1027(g), when provided under an employment 
agreement, therefore would depend on whether the product or service 
relates to a specified plan or arrangement as defined in the statute. 
Accordingly, section 1027(g) does not preclude rulemaking authority 
over employer-provided consumer financial products or services that do 
not relate to a specified plan or arrangement.
---------------------------------------------------------------------------

    \1017\ See 12 U.S.C. 5517(g)(4) (defining the phrase ``specified 
plan or arrangement'' as including certain plans, accounts, or 
arrangements under the Internal Revenue Code of 1986, any employee 
benefit or compensation plan or arrangement, including a plan that 
is subject to title I of the Employee Retirement Income Security Act 
of 1974, and a prepaid tuition program offered by a State). See also 
id. 5517(g)(3)(A) (generally excluding Bureau authority over 
consumer financial products or services that ``relate to'' any 
specified plan or arrangement, absent specified interagency 
proceedings with the IRS and the Department of Labor).
---------------------------------------------------------------------------

    Nonetheless, the Bureau recognizes that employee benefits may be 
subject to employment arbitration agreements and that employment 
arbitration and the regulation of employment arbitration agreements may 
function differently from those the Bureau analyzed in the Study, for 
example because they do not necessarily follow rules designed for 
consumer arbitration. Thus, the Bureau is adopting an exemption in 
Sec.  1040.3(b)(5) to exclude employers to the extent they are offering 
or providing a product or service to an employee as an employee 
benefit. The Bureau is adopting this approach at this time for the 
reasons discussed herein, but notes that it also expects to monitor 
these products and services and could adjust the scope of the rule to 
reach any that are not excluded from the Bureau's rulemaking authority 
under Dodd-Frank section 1027(g).
    For the sake of clarity, because the term ``employer'' is not 
defined in the Dodd-Frank Act, Sec.  1040.3(b)(5) incorporates a well-
recognized definition of employer from Federal law, in section 203(d) 
of the Fair Labor Standards Act (FLSA).\1018\ The Bureau believes that 
this well-established definition of an ``employer,'' has been 
extensively interpreted by courts and is familiar to a wide range of 
employers. While the rule incorporates the case law interpreting the 
definition of employer, it does not incorporate other size or industry 
related restrictions on the coverage of FLSA that are separate from the 
definition of employer.
---------------------------------------------------------------------------

    \1018\ The FLSA defines the term ``employer'' as ``includ[ing] 
any person acting directly or indirectly in the interest of an 
employer in relation to an employee, and includes a public agency, 
but does not include any labor organization (other than when acting 
as an employer) or anyone acting in the capacity of officer or agent 
of such labor organization.'' 29 U.S.C. 203(d). ``Employ'' is in 
turn defined as ``includ[ing] to suffer or permit to work.'' 29 
U.S.C. 203(g).
---------------------------------------------------------------------------

    The exemption includes two important limitations, however. First, 
the exemption would only apply to the employer. If, for example, an 
employer were to partner with a third party that may extend consumer 
credit to the employee, the employer may be exempt with respect to its 
activity of referring its employees to the third party (which otherwise 
may be covered by Sec.  1040.3(a)(1)(iii) in certain circumstances). 
The third-party lender, however, generally would be covered by Sec.  
1040.3(a)(1)(i). Similarly, if an employer extended credit to the 
employee but hired a third party to administer the loan, that third 
party generally would still be covered by Sec.  1040.3(a)(1)(v). 
Likewise, if an employer partners with an unaffiliated bank to provide 
a network-branded payroll card to its employees that is covered by 
Sec.  1040.3(a)(6) because it is an account, then the consumer's 
agreement with the bank generally would be covered because it is 
entered into by the bank, even if the payroll card also may be part of 
a general suite of employee benefits such that the employer may be 
exempt under Sec.  1040.3(b)(5).\1019\
---------------------------------------------------------------------------

    \1019\ See Prepaid Accounts Final Rule, 81 FR 83934, 83940 (Nov. 
22, 2016) (explaining that payroll card accounts are issued to 
consumers by financial institutions that partner with employers). In 
addition, a consumer advocate commenter urged the Bureau to apply 
the rule to claims against employers for violating the Regulation E 
prohibition against compulsory use of payroll accounts, 12 CFR 
1005.10(e)(2), which applies to persons other than the financial 
institution where an account is held. Employers are not subject to 
Sec.  1040.3(a)(6)'s coverage of providers of accounts subject to 
EFTA and Regulation E, which generally applies to financial 
institutions where the accounts are held. See 12 CFR 1005.2(b)(1) 
(defining an ``account'' as one ``held by a financial 
institution''). As a result, the employer exemption in Sec.  
1040.3(b)(5) would not reduce the coverage of these claims, as 
employers are not subject to this rule in connection with the 
provision of accounts under Regulation E in the first place. 
Consistent with the Bureau's approach in adopting Sec.  
1040.3(b)(5), the Bureau declines to expand the scope of Sec.  
1040.3(a)(6) to apply to more parties at this time, although it 
expects to continue to monitor employer activities in this regard.
---------------------------------------------------------------------------

    Second, the exemption only applies when the consumer financial 
product or service is an employee benefit. Whether the product or 
service is an employee benefit will depend on the facts and 
circumstances. As clarified in comment 3(b)(5)-1, however, if an 
employer offers or provides a consumer financial product or service to 
its employee on terms and conditions that it makes available to the 
general public, that is not an employee benefit for purposes of the 
exemption. To the extent that an employer is in the general business of 
providing covered consumer financial products and services, the Bureau 
does not believe that employees should be treated differently from 
other consumers who receive those products and services on the same 
terms and conditions.

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 any such rule be consistent with the Study conducted 
under Dodd-Frank section 1028(a). Dodd-Frank section 1028(d) 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 
regulation's effective date. (The final rule refers to this date--the 
date after the end of the 180-day period beginning on the effective 
date--as the ``compliance date.'' \1020\) Pursuant to this authority 
and the findings set forth in greater detail in Part VI above, the 
Bureau is finalizing Sec.  1040.4, which sets forth conditions or 
limitations on the use of pre-dispute arbitration agreements between 
providers and consumers entered into on or after the compliance 
date.\1021\
---------------------------------------------------------------------------

    \1020\ For additional discussion regarding the compliance date 
provision, see the section-by-section analysis for Sec.  1040.5(a) 
below.
    \1021\ Under Sec.  1040.5(a), compliance with part 1040 is 
required for any pre-dispute arbitration agreement entered into ``on 
or after'' the compliance date. In this section-by-section analysis, 
the Bureau uses the phrases ``on or after the compliance date'' and 
``after the compliance date'' interchangeably.
---------------------------------------------------------------------------

    Section 1028(b) of the Dodd-Frank Act allows the Bureau to regulate 
the ``use'' of the pre-dispute arbitration agreements covered by this 
rule. The Bureau believes that, under the ordinary meaning of this 
provision, a provider's ``use'' of a pre-dispute arbitration agreement 
broadly encompasses the inclusion of such an agreement in an agreement 
for a consumer financial product or service, the content of such an 
agreement, and the reliance on or invocation of such an agreement (for 
example, a motion to compel arbitration of a claim filed as a class 
action). To the extent that the term ``use'' in Section 1028(b) is 
ambiguous, the Bureau believes that interpreting it to cover all these 
circumstances would promote the

[[Page 33359]]

consumer protection, fair competition, and other objectives of the 
Dodd-Frank Act. As explained in Part VI.C, the Bureau's rule--which 
prohibits a provider from including a pre-dispute arbitration agreement 
in a consumer contract that would allow it to block a class claim and 
also prohibits a provider from relying on a pre-dispute arbitration 
agreement to block such a claim--is for the protection of consumers and 
in the public interest.
    Accordingly, final Sec.  1040.4 contains three provisions. Final 
Sec.  1040.4(a)(1) prohibits providers from relying on pre-dispute 
arbitration agreements entered into after the compliance date in class 
actions concerning consumer financial products covered by Sec.  
1040.3.\1022\ Final Sec.  1040.4(a)(2) requires providers, upon 
entering into pre-dispute arbitration agreements for covered products 
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 or provide notices to 
consumers when they enter into a pre-existing agreement. Final Sec.  
1040.4(b) requires providers that include pre-dispute arbitration 
agreements in their consumer contracts or enter into existing contracts 
with pre-dispute arbitration agreements after the compliance date to 
submit specified arbitral and court records to the Bureau.
---------------------------------------------------------------------------

    \1022\ While Dodd-Frank section 1028 refers to ``consumer 
financial products or services,'' the Bureau uses the term 
``products'' in this section for the sake of brevity.
---------------------------------------------------------------------------

    The Bureau notes that providers may respond to the Bureau's rule by 
removing these provisions and adopting provisions in the agreement for 
the covered financial product or service that waive consumers' rights 
to participate in a class action. Providers could attempt to block 
consumers from pursuing class actions by including them in product 
agreements. Of course, the Bureau's rule would not apply to such 
waivers because they would not be part of a contract with a pre-dispute 
arbitration agreement and outside the scope of Section 1028. The Bureau 
will actively monitor consumer financial markets for this practice--and 
for other practices that might function in such a way as to deprive 
consumers of their ability to meaningfully pursue their claims--and 
will assess whether such practices could constitute unfair, deceptive, 
or abusive acts or practices under Dodd-Frank section 1031.
4(a)(1) Use of Pre-Dispute Arbitration Agreements in Class Actions
The Bureau's Proposal
    The Bureau proposed Sec.  1040.4(a)(1) in accordance with its 
authority under section 1028(b) of the Dodd-Frank Act and in 
furtherance of its goal to ensure that class actions are available to 
consumers who are harmed by providers of consumer financial products 
and services. Proposed Sec.  1040.4(a)(1) would have stated that a 
provider shall not seek to rely in any way on a pre-dispute arbitration 
agreement entered into after the rule's 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.\1023\
---------------------------------------------------------------------------

    \1023\ In the proposal, the Bureau noted that the prohibition in 
proposed Sec.  1040.4(a)(1) would apply to providers when relying on 
provisions in pre-dispute arbitration agreements, as well as on the 
overall agreement.
---------------------------------------------------------------------------

    Proposed Sec.  1040.4(a)(1) would have barred providers from 
relying on a pre-dispute arbitration agreement entered into after the 
compliance date, as described above, even if the agreement did not 
include the provision required by proposed Sec.  1040.4(a)(2). In the 
preamble to the proposal, the Bureau gave several examples of such 
scenarios, such as where a third-party debt collector obtained the 
right to collect on an agreement entered into after the compliance date 
by a creditor that was covered by proposed Sec.  1040.3(a) but excluded 
from coverage under proposed Sec.  1040.3(b). The proposal's section-
by-section analysis for proposed Sec.  1040.3(a)(10) contained 
additional examples, specific to debt collection by merchants, of 
scenarios where proposed Sec.  1040.4(a)(1) would have applied even 
where the pre-dispute arbitration agreement itself was not required to 
contain the provision outlined in proposed Sec.  1040.4(a)(2).
    Proposed Sec.  1040.4(a)(1) would have prevented providers from 
relying on a pre-dispute arbitration agreement in a class action unless 
and until the presiding court ruled that the case may not proceed as a 
class action, and, if the ruling may have been subject to interlocutory 
appellate review, the time to seek such review elapsed, or the review 
was resolved. For example, if a case was filed as a putative class 
action and a court had not yet ruled on a motion to certify the class, 
proposed Sec.  1040.4(a)(1) would have prohibited a motion to compel 
arbitration that relied on a pre-dispute arbitration agreement. If the 
court denied a motion for class certification and ordered the case to 
proceed on an individual basis, and the ruling may have been subject to 
interlocutory appellate review--pursuant to Federal Rule 23(f) of the 
Federal Rules of Civil Procedure or an analogous State procedural 
rule--proposed Sec.  1040.4(a)(1) would have prohibited a motion to 
compel arbitration based on a pre-dispute arbitration agreement until 
the time to seek appellate review elapsed or appellate review was 
resolved. If the court denied a motion for class certification--and the 
ruling was either not subject to interlocutory appellate review, the 
time to seek review elapsed, or the appellate court determined that the 
case could not proceed as a class action--proposed Sec.  1040.4(a)(1) 
would have no longer prohibited a provider from relying on a pre-
dispute arbitration agreement.
    Proposed comment 4(a)(1)-1 would have provided a non-exhaustive 
list of six examples of impermissible reliance under proposed Sec.  
1040.4(a)(1). Proposed comments 4(a)(1)-1.i through iii would have 
described conduct by a defendant in a class action lawsuit, and 
proposed comments 4(a)(1)-1.iv through vi described conduct in 
arbitration. In the preamble to the proposal, the Bureau stated that 
one purpose of proposed comments 4(a)(1)-1.iv through vi was to prevent 
providers from evading proposed Sec.  1040.4(a)(1) by filing an 
arbitration claim against a consumer who had already filed a claim on 
the same issue in a putative class action in order to resolve that 
issue in arbitration and stop the class action. The Bureau noted that 
proposed Sec.  1040.4(a)(1) would not have prohibited a provider from 
continuing to arbitrate a ``first-filed'' arbitration claim--i.e., an 
arbitration claim that was filed before the consumer filed a class 
action--although the provider would not be permitted to invoke the pre-
dispute arbitration agreement to block the class action.
    Proposed comment 4(a)(1)-2 would have stated that where a class 
action concerns multiple products or services, and only some of the 
products or services were covered by proposed Sec.  1040.3, the 
prohibition in proposed Sec.  1040.4(a)(1) applied only to claims that 
concern the covered products or services.

[[Page 33360]]

Comments Received
    The Bureau received a wide range of comments on proposed Sec.  
1040.4(a)(1). Some of the comments addressed whether the Bureau's 
attempt to restrict the use of arbitration agreements in proposed Sec.  
1040.4(a)(1) was authorized by section 1028(b)--specifically, whether 
proposed Sec.  1040.4(a)(1) was in the public interest, for the 
protection of consumers, and consistent with the Study. The Bureau 
responds to these comments in Part VI, above, and finds that Sec.  
1040.4(a)(1), as discussed below, satisfies the requirements of section 
1028(b). Below, the Bureau responds to the remaining comments, which 
generally addressed technical aspects of the regulatory text and 
commentary.
    Commenters recommended changes to the regulatory text that they 
thought would clarify when providers may rely on pre-dispute 
arbitration agreements in class actions. A consumer advocate commenter 
suggested that the Bureau add the phrase ``such that a class action may 
not proceed'' to the end of proposed Sec.  1040.4(a)(1) in order to 
clarify that the prohibition on reliance applies until interlocutory 
appellate review has been resolved ``such that a class action may not 
proceed''--and that providers may not rely on pre-dispute arbitration 
agreements where review has been resolved such that a class action may 
proceed. An industry commenter suggested that the Bureau add the word 
``interlocutory'' prior to each use of the word ``review'' in the final 
clause of proposed Sec.  1040.4(a)(1) to help clarify that the waiting 
period being imposed relates to interlocutory review by the court.
    Several commenters requested that the Bureau revise proposed Sec.  
1040.4(a)(1) to accomplish different policy outcomes based on various 
objectives. An individual commenter requested that the Bureau revise 
proposed Sec.  1040.4(a)(1) to permit providers to block class actions 
as long as they allow for class arbitration. This commenter believed 
class arbitration might provide a lower-cost option in some cases. An 
industry commenter suggested that the Bureau further evaluate whether 
class arbitration could achieve the objectives of the rule and 
suggested that such an inquiry might lead the Bureau to formulate a 
rule permitting providers to block class actions as long as class 
arbitration is available. This commenter also believed that class 
arbitration might be more cost effective than class litigation. Another 
industry commenter stated that, because the proposal would ``prohibit 
an institution from inserting a class waiver in its arbitration 
provision,'' the proposal represents an endorsement of class 
arbitration. An individual commenter suggested that the Bureau extend 
proposed Sec.  1040.4(a)(1) to ban providers from relying on pre-
dispute arbitration agreements in individual lawsuits brought by 
military servicemembers and spouses of servicemembers. The commenter 
noted that the MLA bars many types of creditors from enforcing 
arbitration agreements against members of the armed forces on active 
duty or active Guard and Reserve duty (and their families); however, 
the commenter pointed out that the Bureau's rule would cover a wider 
range of consumer financial products and services than the MLA and its 
implementing regulations.\1024\
---------------------------------------------------------------------------

    \1024\ See MLA, 10 U.S.C. 987, and its implementing regulations, 
32 CFR part 232.
---------------------------------------------------------------------------

    A few commenters requested that the Bureau clarify the application 
of proposed Sec.  1040.4(a)(1). A trade association of defense lawyers 
stated that the Bureau should clarify whether invoking arbitration 
against an absent class member would constitute impermissible reliance 
under proposed Sec.  1040.4(a)(1). In the commenter's view, if invoking 
arbitration under these circumstances would be impermissible, providers 
would face great difficulty complying with the rule, because class 
action complaints often include vague class definitions that can make 
it hard to know, at the outset of a case, which consumers are part of 
the proposed class. The same commenter also requested that the Bureau 
clarify whether, in the case of a first-filed arbitration--i.e., where 
there is an ongoing arbitration regarding the same issue when the 
consumer files a class action--a provider can plead that arbitral award 
as binding under the FAA and raise res judicata and mootness defenses 
to seek a dismissal of the class action. An industry commenter asked 
the Bureau to confirm that proposed Sec.  1040.4(a)(1) would only 
preclude a broker-dealer from enforcing an arbitration agreement in a 
class action against a consumer to the extent that the relevant class 
action ``related to'' a covered consumer financial product or service. 
Another industry commenter asked the Bureau to clarify whether a 
provider would be required to comply with proposed Sec.  1040.4(a)(1) 
where a pre-dispute arbitration agreement does not apply to a covered 
product or service, but where the pre-dispute arbitration agreement was 
part of a transaction that involved some covered products or services. 
The commenter expressed concern that proposed Sec.  1040.4(a)(1)'s 
prohibition on reliance on a pre-dispute arbitration agreement in a 
class action ``related to any of the consumer financial products or 
services covered by Sec.  1040.3'' could include pre-dispute 
arbitration agreements for non-covered products that were entered into 
as part of a transaction involving some covered products. An individual 
commenter requested that the Bureau clarify that the rule would not 
preclude a consumer from filing an individual arbitration if the 
consumer so desires.
    In addition, a trade association of defense lawyers asserted that 
proposed Sec.  1040.4(a)(1) would exceed the Bureau's legal authority. 
According to the commenter, the prohibition in proposed Sec.  
1040.4(a)(1) would raise separation-of-powers concerns under the 
Constitution, because it could be viewed as regulating a defendant's 
conduct in court, and would also exceed the Bureau's authority under 
the Dodd-Frank Act, because the Act does not grant the Bureau authority 
to regulate parties' conduct in judicial proceedings.
    An industry commenter requested that the final rule state that a 
company does not violate the rule simply by pursuing its legal rights 
in good faith. The commenter expressed concern that if a company moves 
to compel arbitration based on a good faith belief that the relevant 
product is not covered, and the court determines that the product is 
covered, the company will have violated proposed Sec.  1040.4(a)(1)--
and could face penalties under title X of the Dodd-Frank Act--for doing 
nothing more than asserting what it believed to be its legitimate 
interpretation of the rule and the Act. The commenter expressed concern 
that the proposal would chill defendants from invoking arbitration 
agreements where they had a good faith basis to believe they could do 
so without violating part 1040. Similarly, the trade association of 
defense lawyers stated that, under the proposal, it was unclear whether 
a defendant would violate the rule by moving to compel arbitration or 
seeking to plead its right to arbitrate in the event that class 
certification is ultimately denied. The commenter also expressed 
concern that arguing, in opposition to class certification, that 
individual arbitration is a superior alternative to class litigation 
for resolving the dispute could be construed as ``relying'' on an 
arbitration agreement in a class action and therefore would be a 
violation of the rule.\1025\ The commenter did not cite to examples of 
such pleadings.
---------------------------------------------------------------------------

    \1025\ To certify a case as a class action, a Federal court must 
find, among other things, that a class action is superior to other 
available methods for fairly and efficiently resolving the 
controversy. See FRC.P. 23(b)(3).

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

[[Page 33361]]

    Finally, a consumer advocate commenter expressed support for 
comment 4(a)(1)-1--the non-exhaustive list containing examples of 
conduct that would constitute impermissible reliance on a pre-dispute 
arbitration agreement under Sec.  1040.4(a)(1)--as drafted.
The Final Rule
    Pursuant to the Bureau's authority under Dodd-Frank section 1028(b) 
to impose conditions or limitations on the use of pre-dispute 
arbitration agreements between covered persons and consumers for 
consumer financial products and services, the Bureau is finalizing 
Sec.  1040.4(a)(1) with limited modifications as described below. For 
the reasons described above in Part VI, the Bureau finds that Sec.  
1040.4(a)(1) satisfies the requirements of section 1028(b) because it 
is in the public interest and for the protection of consumers, and 
because the related findings are consistent with the Study that the 
Bureau conducted pursuant to section 1028(a).
    Similar to what was proposed, the Bureau is finalizing Sec.  
1040.4(a)(1) to state that a provider shall not rely in any way on a 
pre-dispute arbitration agreement entered into after the rule's 
compliance date with respect to any aspect of a class action concerning 
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 such review has been resolved such that the 
case cannot proceed as a class action.
    Final Sec.  1040.4(a)(1) differs from proposed Sec.  1040.4(a)(1) 
in several respects. First, instead of using the phrase ``related to'' 
to describe the nexus between the class action and the covered consumer 
financial service or product that triggers application of the rule, the 
final rule uses the phrase ``concerning.'' The Bureau is making this 
change for consistency with other provisions in the rule that use the 
phrase ``concerning'' to describe this nexus, including in Sec.  
1040.2(c) (definition of pre-dispute arbitration agreement), Sec.  
1040.4(a)(2) (contract provisions), and Sec.  1040.4(b) (monitoring 
rule). Second, the Bureau has added the phrase ``such that the case 
cannot proceed as a class action'' to the end of proposed Sec.  
1040.4(a)(1). In the Bureau's view, the prohibition in proposed Sec.  
1040.4(a)(1) would have applied if review had been resolved such that a 
case may proceed as a class action. However, the Bureau agrees with the 
consumer advocate commenter's assertion that this phrase more precisely 
conveys the scope of the provision's prohibition on reliance in a class 
action. Third, in response to the industry commenter that requested 
that the Bureau clarify that both uses of the word ``review'' in the 
final clause of proposed Sec.  1040.4(a)(1) refer to interlocutory 
review, the Bureau has revised the phrase ``or the review has been 
resolved'' to read ``or such review has been resolved.'' Fourth, 
instead of prohibiting seeking to rely on an arbitration agreement in a 
class action, the rule prohibits relying on the arbitration agreement 
in a class action. The Bureau believes the term ``seek'' is not needed. 
A motion that seeks to compel arbitration, for example, relies on an 
arbitration agreement, as clarified in comment 4(a)(1)-1.i.
    The commentary to the final rule also includes new comment 4(a)(1)-
1.ii, which contains an example of conduct that does not constitute 
reliance. The comment 4(a)(1)-1.ii states that reliance on a pre-
dispute arbitration agreement does not include seeking or taking steps 
to preserve a class action defendant's ability to seek arbitration 
after the trial court has denied a motion to certify the class and 
either an appellate court has affirmed that decision on an 
interlocutory appeal of that motion, or the time to seek such an appeal 
has elapsed. This comment is intended to address the concern raised by 
the trade association of defense lawyers' comment that a defendant 
could violate the rule by moving to compel arbitration, or seeking to 
assert its contingent right to arbitrate in the future in the event 
that the case cannot proceed as a class action (e.g., because class 
certification is denied).
    The commentary to the final rule also includes new comment 4(a)(1)-
2. This comment is intended to address the industry commenter's concern 
that Sec.  1040.4(a)(1) would chill defendants from moving to compel 
arbitration when they have a good faith basis to believe that they 
could do so without violating the rule. The Bureau believes that, in 
the vast majority of cases, providers will know whether the rule 
applies--particularly because the Bureau has defined coverage primarily 
in relation to existing statutes and, where applicable, their 
implementing regulations. However, the Bureau acknowledges that, at the 
margins, some cases will raise questions about whether the rule covers 
particular persons, particular agreements, or particular consumer 
financial products and services. In some instances, a person may be 
genuinely uncertain about the rule's application in a particular class 
action case. New comment 4(a)(1)-2 clarifies that a class action 
defendant does not violate Sec.  1040.4(a)(1) by, for example, relying 
on a pre-dispute arbitration agreement where it has a genuine belief 
that either it is not a provider pursuant to Sec.  1040.2(d) or that 
none of the claims asserted in the class action concern any of the 
consumer financial products or services covered pursuant to Sec.  
1040.3.
    The Bureau intends comment 4(a)(1)-2 to mirror the Noerr-Pennington 
doctrine and therefore is using the term ``genuine'' to reflect the 
meaning of that term in the context of the Noerr-Pennington doctrine. 
Under the Noerr-Pennington doctrine, where a statute does not provide 
otherwise, it is presumed not to penalize conduct that implicates the 
protections afforded by the First Amendment's Petition Clause. But 
parties do not enjoy immunity for ``sham'' petitioning, that is, 
petitioning that is not ``genuine.'' \1026\ The Court has held that 
litigation is a ``sham'' when (1) it is objectively baseless in the 
sense that no reasonable litigant could realistically expect success on 
the merits, and (2) the litigant's subjective motivation conceals an 
attempt to use the governmental process in a manner that violates the 
relevant Federal law.\1027\ Comment 4(a)(1)-2 mirrors the Noerr-
Pennington doctrine in clarifying that a class action defendant does 
not violate Sec.  1040.4(a)(1) where it relies on a pre-dispute 
arbitration agreement--such as by filing a motion to compel 
arbitration--in a manner that constitutes ``genuine'' petitioning under 
this two-part Noerr-Pennington test. However, where a defendant relies 
on a pre-dispute arbitration agreement (such as by filing a motion to 
compel arbitration) in a manner that constitutes ``sham'' petitioning--
because the motion is objectively baseless and subjectively in bad 
faith--a Noerr-Pennington defense does not apply and the defendant 
violates Sec.  1040.4(a)(1).
---------------------------------------------------------------------------

    \1026\ See BE & K Const. Co. v. N.L.R.B., 536 U.S. 516, 524-26 
(2002) (``The right of access to the courts is . . . but one aspect 
of the right of petition . . . [yet] while genuine petitioning is 
immune from antitrust liability, sham petitioning is not.''), 
quoting California Motor Transport Co. v. Trucking Unlimited, 404 
U.S. 508 (1972).
    \1027\ See BE & K Const. Co., 536 U.S. at 526, quoting 
Professional Real Estate Investors, Inc. v. Columbia Pictures 
Industries, Inc., 508 U.S. 49, 60-61 (1993).
---------------------------------------------------------------------------

    The Bureau has also made a technical corrections to comment 
4(a)(1)-1

[[Page 33362]]

including to conform the language more closely to the regulation text 
in Sec.  1040.4(a)(1) and (a)(2).\1028\
---------------------------------------------------------------------------

    \1028\ To reflect the fact that the provisions specified in 
Sec.  1040.4(a)(2) now use the term ``rely on,'' the prefatory 
sentence for comment 4(a)(1)-1 now states that both Sec.  
1040.4(a)(1) and (a)(2) use the term ``rely on.'' Comment 4(a)(1)-
1.i also is revised to clarify that the conduct that constitutes 
reliance is in relation to a pre-dispute arbitration agreement.
---------------------------------------------------------------------------

    The Bureau declines to revise proposed Sec.  1040.4(a)(1) to permit 
providers to block class actions as long as they allow for class 
arbitrations. The Bureau believes that allowing consumers to seek class 
action relief is in the public interest, for the protection of 
consumers, and consistent with the Study.\1029\ Consumers have brought 
consumer financial class actions under Federal Rule 23 of the Federal 
Rules of Civil Procedure for approximately 50 years, and they are a 
proven mechanism by which consumers can enforce their legal rights and 
obtain redress when those rights are violated. In contrast, the Bureau 
has not seen--and commenters did not offer--evidence to demonstrate 
that class arbitration would be able to accomplish these objectives as 
effectively. The Bureau believes that, compared with consumer finance 
class actions, consumer finance class arbitration is less proven, and 
may even be characterized as mostly untested, as a procedure for 
adjudicating consumer finance disputes. The Study identified only two 
consumer finance class arbitrations filed between 2010 and 2012; one 
was still pending on a motion to dismiss as of September 2014, and the 
other class arbitration contained no information other than the 
arbitration demand that followed a State court decision granting the 
company's motion seeking arbitration.\1030\ Further, as the proposal 
noted, industry groups have heavily criticized class arbitration on the 
ground that it lacks procedural safeguards. For example, arbitrator 
decisions in class arbitrations--such as decisions to certify a class 
or award damages--are generally subject to limited judicial 
review.\1031\ Consumer advocates have also criticized several aspects 
of class arbitration, including its lack of procedural 
safeguards.\1032\ The Bureau received similar feedback from stakeholder 
groups during the extensive outreach the Bureau conducted during the 
Study process and during the pre-proposal stage of the rulemaking 
process.\1033\ Without further evidence, the Bureau cannot conclude 
that class arbitrations provide a viable alternative to class actions. 
For this reason, the Bureau is not revising proposed Sec.  1040.4(a)(1) 
to allow providers to block class actions as long as they allow for 
class arbitration.
---------------------------------------------------------------------------

    \1029\ See supra Part VI (the Bureau's findings that the final 
rule is in the public interest and for the protection of consumers).
    \1030\ See Study, supra note 3, section 5 at 86-87.
    \1031\ In an 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.'' Brief of the Chamber of Commerce of the United States 
of America as Amicus Curiae in Support of Plaintiffs-Appellants at 
9, Marriott Ownership Resorts, Inc. v. Sterman, No. 15-10627 (11th 
Cir. Apr. 1, 2015).
    \1032\ For example, a consumer advocate commenter asserted that 
all arbitrations, including class arbitrations, are unfair due to--
among other things--the alleged repeat-player bias among 
arbitrators, the more-limited discovery rights of the plaintiff 
compared to court, and the limited judicial review of arbitrators' 
decisions.
    \1033\ See supra Parts III.A and III.C (describing stakeholder 
outreach the Bureau conducted as part of the Study process) and Part 
IV (describing stakeholder outreach the Bureau conducted following 
the release of the Study).
---------------------------------------------------------------------------

    The Bureau notes, however, that Sec.  1040.4(a)(1) would not 
preclude the use of class arbitration as a forum. Final Sec.  
1040.4(a)(1) would permit an arbitration agreement that allows for 
class arbitration, if it also allowed a consumer the option of pursuing 
class litigation instead. 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. 
The Bureau expects that, if class arbitration proves to be an efficient 
procedure through which consumers can enforce their rights and obtain 
redress, providers will make the option available to consumers and 
consumers will choose it over class litigation in court. Additionally, 
as with individual arbitration and as discussed in greater detail below 
in the section-by-section analysis of Sec.  1040.4(b), the Bureau will 
monitor any class arbitrations that do occur.
    With respect to the industry commenter's assertion that the 
proposal represents an endorsement of class arbitration because it 
would prohibit institutions from inserting class waivers into their 
arbitration agreements, the Bureau believes the commenter misunderstood 
the proposal. Final Sec.  1040.4(a)(1)--like proposed Sec.  
1040.4(a)(1)--would prohibit providers from relying on pre-dispute 
arbitration agreements in class action lawsuits. It would not prohibit 
providers from adopting terms preventing class arbitration.
    With respect to the trade association of defense lawyers' comment 
that requesting clarification of the application of the rule to a 
litigant's possible opposition to class certification on the grounds 
that individual arbitration is superior, the Bureau disagrees that such 
a clarification is needed. The Bureau does not understand from the 
comment how a company could assert that individual arbitration pursuant 
to an arbitration agreement is superior to a class action if the 
company could not actually, under the rule, be permitted to compel 
individual arbitration in a class action. Because individual 
arbitration of the named plaintiff's claims in a class action could not 
be compelled under the arbitration agreement, it appears speculative 
that a company could assert superiority of such a method of dispute 
resolution in the context of a class action governed by the Bureau's 
rule. In any event, the Bureau's rule does not prohibit a defendant 
from arguing that a class action would not be superior to individual 
resolution generally based on the facts at issue in a particular case. 
The Bureau therefore does not believe the issue warrants clarification 
in the final rule. The Bureau intends to monitor any specific practices 
that may emerge in this regard, however, and may exercise its statutory 
authorities as appropriate to clarify the rule or to take other 
appropriate action in order to prevent circumvention or evasion of the 
rule.
    In response to the individual commenter's request regarding the 
MLA, the Bureau notes, as an initial matter, that the final rule will 
not supersede the MLA's protections because the final rule and the 
MLA's prohibition on enforcing arbitration agreements do not conflict. 
The MLA bans certain categories of creditors from using pre-dispute 
arbitration agreements in certain consumer credit agreements and from 
enforcing existing pre-dispute arbitration agreements.\1034\ Because 
those consumer credit agreements are prohibited from having pre-dispute 
arbitration agreements going forward, there would be no such agreements 
that would trigger application of the Bureau's rule. Thus, where a 
particular agreement is covered by both part 1040 and the MLA's 
prohibition, providers need not be concerned that the two legal regimes 
create conflicting obligations because the MLA bars the provider from 
using a pre-dispute arbitration agreement altogether.
---------------------------------------------------------------------------

    \1034\ 10 U.S.C. 987(e)(3) and (f)(4); 32 CFR 232.8(c) and 
232.9(d).

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

[[Page 33363]]

    The Bureau declines to prohibit the enforcement of pre-dispute 
arbitration agreements against servicemembers and the spouses of 
servicemembers in the final rule, as requested by the commenter. As 
described elsewhere in this final rule, the Bureau considered and 
rejected an alternative under which the Bureau would have prohibited 
altogether the enforcement of covered pre-dispute arbitration 
agreements against consumers.\1035\ Neither the Study nor the 
commenters offered evidence demonstrating that individual arbitrations 
involving servicemembers and their families are inferior to individual 
litigation in terms of remedying consumer harm or unique from 
arbitration involving non-servicemembers. Consistent with the Bureau's 
current consumer protection work involving servicemembers and their 
families, the Bureau will continue to monitor the offering and 
provision of consumer financial products and services to servicemembers 
and their families.
---------------------------------------------------------------------------

    \1035\ The potential alternative of a complete ban on 
arbitration agreements is discussed in the Bureau's Section 
1022(b)(2) Analysis.
---------------------------------------------------------------------------

    In response to the industry commenter that requested clarification 
as to whether Sec.  1040.4(a)(1) would ban reliance on a pre-dispute 
arbitration agreement for a non-covered product or service, where the 
original transaction involved some covered products or services, the 
Bureau notes that a provider that offers or provides non-covered 
products or services must comply with part 1040 only for the products 
and services it provides that are covered under Sec.  1040.3. The 
Bureau explains this issue further in comment 2(d)-1.
    Regarding the trade association of defense lawyers' comment that 
requested that the Bureau clarify the rule's application in relation to 
absent class members of a putative class action, the commenter appears 
to envision a scenario in which a provider moves to compel arbitration 
in an individual lawsuit against a plaintiff who is also a putative 
class member in a pending class action against the provider relating to 
the same dispute. The commenter asked whether such a motion to compel 
would constitute impermissible reliance under proposed Sec.  
1040.4(a)(1), especially in light of proposed comment 4(a)(1)-1.ii, 
which would have stated that reliance on an arbitration agreement under 
Sec.  1040.4(a)(1) includes ``seeking to exclude a person or persons 
from a class in a class action.'' The Bureau disagrees with the 
commenter that that comment was ambiguous. That comment refers to 
exclusions of persons from a class ``in a class action.'' For example, 
defendants may file motions in a pending class action to strike or 
reform or narrow the class definition to exclude persons who have pre-
dispute arbitration agreements. The example in the comment clarifies 
that such exclusions are not permitted by the rule. The example does 
not reach parallel individual litigation. In particular, that example 
does not apply to individual litigation with consumers who may or may 
not be covered by alleged class definitions in a pending class 
complaint or class definitions in a certified class or preliminarily or 
finally approved class settlement. If a consumer elects to file an 
individual lawsuit against a provider, that consumer's individual 
lawsuit will be subject to the rule on the same basis as any individual 
lawsuit (i.e., a motion to compel arbitration may be permitted and the 
monitoring rule will apply), without regard to the existence of 
parallel class litigation that may or may not affect that consumer.
    The trade association of defense lawyers' comment also requested 
clarification as to the preclusive effect of an arbitral award under a 
``first-filed'' arbitration--i.e., an arbitration that is ongoing when 
a consumer files a class action relating to the same dispute. As the 
Bureau stated in the preamble for proposed Sec.  1040.4(a)(1), where a 
consumer files a class action, and there is already a pending 
arbitration claim relating to the same dispute, proposed Sec.  
1040.4(a)(1) would not prohibit the provider from continuing with the 
arbitration, but it would prohibit the provider from using an 
arbitration agreement to block the class action claim. However, if the 
provider wins the first-filed arbitration, the provider could plead the 
arbitral outcome as binding under the FAA on any consumer who was a 
party in the arbitration pursuant to applicable res judicata and claim 
preclusion law. Final Sec.  1040.4(a)(1) would not prohibit the 
provider from ``relying on'' the award in this context.
    In response to the individual commenter that requested that the 
Bureau clarify that the rule would not preclude a consumer from filing 
an individual arbitration, the Bureau confirms that nothing in the rule 
would preclude this. And in response to the industry commenter that 
requested that the Bureau confirm that proposed Sec.  1040.4(a)(1) 
would only preclude a broker-dealer from enforcing an arbitration 
agreement in a class action against a consumer to the extent that the 
relevant class action ``related to'' a covered consumer financial 
product or service, the Bureau notes that the final rule contains an 
exemption for broker-dealers.\1036\ Persons covered by this exemption 
are not providers and are therefore not subject to any of the 
requirements of part 1040.\1037\
---------------------------------------------------------------------------

    \1036\ See Sec.  1040.3(b)(1)(i).
    \1037\ In general, however, as to entities that are providers, 
the commenter's understanding is correct. Section 1040.4(a)(1)'s 
prohibition applies only with respect to a class action that 
concerns any of the consumer financial products or services covered 
by Sec.  1040.3(a). So even where a provider is providing a product 
or service covered by Sec.  1040.3(a), the provider may still rely 
on arbitration agreements in class actions that do not concern a 
product or service covered by Sec.  1040.3(a).
---------------------------------------------------------------------------

    Finally, the Bureau disagrees with the trade association of defense 
lawyers' comment asserting that proposed Sec.  1040.4(a)(1) would raise 
separation-of-powers concerns under the U.S. Constitution and would 
exceed the Bureau's authority under the Dodd-Frank Act by regulating a 
defendant's conduct in court (i.e., by limiting a defendant's ability 
to enforce a pre-dispute arbitration agreement in a class action). The 
Bureau is not aware of, and the commenter did not provide a legal basis 
for such a concern. In addition, the Bureau is issuing part 1040 
pursuant to a direct grant of statutory authority: Dodd-Frank section 
1028(b). That statute authorizes the Bureau to prohibit or impose 
conditions or limitations on the use of pre-dispute arbitration 
agreements in contracts for consumer financial products and services. 
Because parties frequently enforce such agreements through the judicial 
process, the authority to prohibit or impose conditions or limitations 
on their use necessarily includes the authority to regulate a 
defendant's conduct in court.\1038\
---------------------------------------------------------------------------

    \1038\ See supra section-by-section analysis of Sec.  
1040.4(a)(1) (describing new comment 4(a)(1)-2 clarifying that the 
rule does not burden conduct protected by the First Amendment's 
Petition Clause).
---------------------------------------------------------------------------

4(a)(2) Provision Required in Covered Pre-Dispute Arbitration 
Agreements
The Bureau's Proposal
    The Bureau proposed Sec.  1040.4(a)(2) in accordance with its 
authority under Dodd-Frank section 1028(b) and in furtherance of its 
goal to ensure that class actions are available to consumers who are 
harmed by providers of consumer financial products and services. 
Proposed Sec.  1040.4(a)(2)(i) would have generally required providers, 
upon entering into a pre-dispute arbitration agreement for a covered 
product or service after the compliance date, to ensure that the 
agreement contained a specified provision stating that neither the 
provider nor anyone else would use the

[[Page 33364]]

agreement to stop the consumer from being part of a class action. 
Proposed Sec.  1040.4(a)(2)(ii) would have contained an optional, 
alternative provision that providers could use where a pre-dispute 
arbitration agreement applied to both covered and non-covered products 
and services. Where a pre-dispute arbitration agreement existed 
previously between other parties and did not contain either of these 
two required provisions, proposed Sec.  1040.4(a)(2)(iii) would have 
required providers entering into such agreements to either amend them 
to add a specified provision or send the consumer a notice with 
specified language. The Bureau summarizes proposed Sec.  1040(a)(2)(i)-
(iii) in greater detail below.
    Proposed Sec.  1040.4(a)(2)(i) would have stated 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 consumer financial product or service 
covered by proposed Sec.  1040.3 after the compliance date, ensure that 
the 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.

As noted in the proposal, the Bureau designed this requirement to make 
consumers, courts, and other relevant third parties (including 
potential purchasers) aware that the agreement may not be used to 
prevent a consumer from pursuing a class action. The Bureau intended 
this provision to be limited to class action cases concerning a 
consumer financial product or service covered by proposed Sec.  1040.3. 
In addition, the Bureau intended the phrase ``neither we nor anyone 
else shall use this agreement'' to inform consumers that the provision 
also bound third parties that may seek to rely on the agreement.
    The proposal noted that the Bureau intended the phrase ``contains 
the following provision'' in proposed Sec.  1040.4(a)(2)(i) to clarify 
that the specified text should be included as a contractual provision 
within the pre-dispute arbitration agreement--as, for instance, the 
Federal Trade Commission's Holder in Due Course Rule also 
requires.\1039\ Providers would not have been permitted, for example, 
to include the required language as a separate notice or consumer 
advisory, except in certain circumstances under proposed Sec.  
1040.4(a)(2)(iii). The proposal also noted that, similar to the 
Bureau's understanding of the provision required by the Holder in Due 
Course Rule, the Bureau intended 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 expected that the provision 
required by proposed Sec.  1040.4(a)(2)(i) would have had a 
substantially similar legal effect through the operation of applicable 
contract law.
---------------------------------------------------------------------------

    \1039\ 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.
---------------------------------------------------------------------------

    As the proposal stated, the Bureau designed the Sec.  
1040.4(a)(2)(i) provision--as well as the Sec.  1040.4(a)(2)(ii) and 
(iii)(A) provisions and the Sec.  1040.4(a)(2)(iii)(B) notice--to use 
plain language. While the Bureau did not believe that disclosure 
requirements or consumer education could materially increase the filing 
of individual claims in arbitration or litigation, the Bureau believed 
that consumers who consulted their contracts should be able to 
understand their dispute resolution rights.
    Where a pre-dispute arbitration agreement was in a contract for 
multiple products or services, only some of which were covered under 
proposed Sec.  1040.3, proposed Sec.  1040.4(a)(2)(ii) would have 
permitted (but not required) providers to include the following 
alternative contract provision in place of the one required by proposed 
Sec.  1040.4(a)(2)(i):

    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.

As the proposal stated, where providers use a single contract for both 
covered and non-covered products and services, the Bureau believed that 
the alternative provision would have improved consumer understanding by 
alerting consumers that the provision may not apply to non-covered 
products or services.
    Proposed Sec.  1040.4(a)(2)(iii) would have set forth how to comply 
with proposed Sec.  1040.4(a)(2) in circumstances where a provider 
entered into a pre-existing pre-dispute arbitration agreement that did 
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), presumably because the original agreement was entered 
into by person that was not a provider and thus was not subject to any 
of those provisions or because the original agreement was entered into 
before the compliance date. Under proposed Sec.  1040.4(a)(2)(iii), 
within 60 days of entering into the pre-dispute arbitration agreement, 
providers would have been required either to ensure that the agreement 
was amended to contain the provision specified in proposed Sec.  
1040.4(a)(2)(iii)(A) or to provide any consumer to whom the agreement 
applied with the written notice specified in proposed Sec.  
1040.4(a)(2)(iii)(B). For providers that chose to ensure that the 
agreement is amended, the provision specified by proposed Sec.  
1040.4(a)(2)(iii)(A) would have been 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 chose to provide consumers with a written 
notice, the required notice provision specified by Sec.  
1040.4(a)(2)(iii)(B) would have been 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.

    As the proposal stated, the Bureau believed that the notice option 
afforded by proposed Sec.  1040.4(a)(2)(iii)(B) would have reduced the 
burden to providers for whom amendment may be impossible, challenging, 
or costly while preserving the consumer awareness benefits of Sec.  
1040.4(a)(2)(iii)(A). The Bureau also noted that, whether the provider 
elected to ensure that the agreement is amended, chose to provide the 
required notice, or violated proposed Sec.  1040.4(a)(2)(iii) by 
failing to do either, the provider would still have been required to 
comply with proposed Sec.  1040.4(a)(1).
    The proposal also described how buyers of medical debt would have 
needed to perform due diligence, in some cases, to determine how the 
rule would have applied to the debts they buy. In cases involving 
incidental credit that is subject to ECOA, debt buyers

[[Page 33365]]

may have faced additional impacts from the rule from additional due 
diligence to determine which acquired debts arise from credit 
transactions \1040\ or 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 
described these impacts in detail in the proposal's Section 1022(b)(2) 
Analysis.
---------------------------------------------------------------------------

    \1040\ As the proposal noted, 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 77 FR 
65775, 65780 (Oct. 31, 2012).
---------------------------------------------------------------------------

    Proposed commentary. To clarify the application of proposed Sec.  
1040.4(a)(2), the proposal contained three proposed comments. Proposed 
comment 4(a)(2)-1 would have highlighted an important distinction 
between proposed Sec.  1040.4(a)(2) and proposed Sec.  1040.4(a)(1). In 
general, proposed Sec.  1040.4(a)(1) would have applied to providers 
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, if a debt collector had not entered 
into a pre-dispute arbitration agreement that applied to the debt, 
proposed Sec.  1040.4(a)(1) would still have prohibited the debt 
collector from moving to compel a class action case against it to 
arbitration on the basis of that agreement, so long as the agreement 
was entered into after the compliance date by a creditor who extended 
consumer credit as described in Sec.  1040.3(a)(1)(i). This would be 
the case without regard to whether the creditor was excluded from the 
rule by Sec.  1040.3(b). In contrast, proposed Sec.  1040.4(a)(2) would 
have applied to providers only when they entered into a pre-dispute 
arbitration agreement for a product or service.\1041\ Thus, proposed 
Sec.  1040.4(a)(2) would not have applied to the debt collector in the 
example cited previously; but it would have applied to a debt buyer 
that acquired or purchased a product covered by proposed Sec.  1040.3 
after the compliance date and became a party to the pre-dispute 
arbitration agreement.\1042\ Proposed comment 4(a)(2)-1 would have 
clarified 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.
---------------------------------------------------------------------------

    \1041\ 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).
    \1042\ See proposed comment 4-1.i (providing examples of 
entering into a pre-dispute arbitration agreement).
---------------------------------------------------------------------------

    Proposed comment 4(a)(2)-2 would have provided an illustrative 
example clarifying how proposed Sec.  1040.4(a) applied in the context 
of portfolio mergers and acquisitions. The comment described a 
hypothetical scenario in which Bank A acquired Bank B after the 
compliance date and Bank B had entered into pre-dispute arbitration 
agreements before the compliance date. The comment stated that if, as 
part of the acquisition, Bank A acquired products of Bank B's that were 
subject to pre-dispute arbitration agreements (and thereby entered into 
such agreements), proposed Sec.  1040.4(a)(2)(iii) would have required 
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 have clarified that providers may 
provide the notice in any way the provider communicates with the 
consumer, including electronically. The proposed comment would have 
further explained that providers may either provide the notice as a 
standalone document or include it in another notice that the customer 
receives, such as a periodic statement, to the extent permitted by 
other laws and regulations. The Bureau stated in the proposal that it 
believes that giving providers a wide range of options for furnishing 
the notice would accomplish the goal of informing consumers while 
reducing the burden on providers.
    For ease of reference, in this section-by-section analysis, the 
Bureau refers to the contract provision that would be required by 
proposed Sec.  1040.4(a)(2)(i) as the ``required 4(a)(2)(i) 
provision''; the optional, alternative provision permitted by Sec.  
1040.4(a)(2)(ii) as the ``optional 4(a)(2)(ii) provision''; and the 
provisions specified in Sec.  1040.4(a)(2)(iii) as the ``4(a)(2)(iii) 
amendment'' and the ``4(a)(2)(iii) notice.'' The Bureau also refers to 
the provisions specified in Sec.  1040.4(a)(2) collectively as the 
``4(a)(2) provisions'' or simply ``the provisions.''
Comments Received
    The Bureau received a wide range of comments on proposed Sec.  
1040.4(a)(2). Several comments addressed the 4(a)(2) provisions as a 
whole, while the other comments concerned individual provisions.
    Several commenters addressed the Bureau's overall approach to Sec.  
1040.4(a)(2). An industry commenter requested that the Bureau give 
providers the flexibility to disclose the provisions ``in substance'' 
rather than verbatim (as required by the proposal). The commenter 
argued that providers need such flexibility because the provisions' 
terminology may not conform to the rest of the provider's agreement. 
The commenter also stated that such flexibility would also avoid class 
actions over typographical errors and other minor issues. Another 
industry commenter expressed concern that plaintiffs could construe the 
provisions as a waiver by the defendant of its right to assert certain 
defenses in a class action, such as defenses to class certification. A 
State regulator commenter requested that the Bureau clarify whether the 
provisions would apply only to class actions brought under Federal and 
State consumer protection laws or also to class actions brought under 
other Federal and State laws. A consumer advocate commenter suggested 
that the provisions be reframed as a relinquishment of the provider's 
right to rely on the pre-dispute arbitration agreement in a class 
action (rather than merely as a binding agreement not to do so).
    A trade association of lawyers who represent investors praised the 
provisions for conveying the consumer's rights in plain language, 
stating that the proposed language is much simpler than similar 
language required by FINRA for securities contracts.\1043\ This 
commenter also suggested that the Bureau require that the relevant 
provision be included in all pre-dispute arbitration agreements; that a 
separate notice containing the provision be sent to consumers with 
existing agreements; that the Bureau mandate that the provision be 
conspicuously placed and not in a smaller font size or otherwise 
diminished in importance relative to the rest of the agreement; and 
that covered firms be required to include the provision on their Web 
sites. A consumer advocate commenter emphasized that, in its opinion, 
the phrase ``neither we nor anyone else'' in each of the proposed 
provisions is vital

[[Page 33366]]

because it would bind third parties who may be assigned the contract.
---------------------------------------------------------------------------

    \1043\ See FINRA, ``Requirements When Using Predispute 
Arbitration Agreements for Customer Accounts,'' at Rule 2268(f).
---------------------------------------------------------------------------

    A consumer advocate commenter requested that the Bureau revise 
proposed Sec.  1040.4 to include additional sanctions on providers that 
violate Sec.  1040.4(a)(2). The commenter requested that the Bureau 
forbid providers from relying on an arbitration agreement in an 
individual (i.e., non-class) suit if the provider failed to include the 
required 4(a)(2)(i) provision. The commenter also requested that the 
Bureau state that non-compliant agreements may not be severed or 
reformed after litigation has commenced. In the commenter's view, these 
provisions would help deter providers from intentionally omitting the 
required provision. The commenter stated that providers may omit the 
provision in the hope that plaintiffs or courts may be unaware of the 
Bureau's rule or with the expectation that, if caught omitting the 
provision, courts would merely require the provider to reform the 
agreement, leaving the provider no worse off than if it had initially 
complied with the rule. The commenter additionally requested that the 
Bureau add a provision stating that non-compliant arbitration 
agreements--e.g., agreements that do not include a provision required 
by Sec.  1040.4(a)(2)--are null and void. Other commenters raised 
issues specific to automobile lending. An industry commenter expressed 
concern that automobile finance companies would include one of the 
4(a)(2) provisions in retail installment sales contract or lease forms, 
and that, as a result, the provision would bind dealers otherwise 
exempt from the Bureau's jurisdiction pursuant to Dodd-Frank section 
1029. The commenter suggested that the final rule state expressly that 
proposed Sec.  1040.4(a)(2) does not apply to any transaction 
originated by an excluded person pursuant to proposed Sec.  1040.3(b). 
Another industry commenter stated that, in its view, proposed Sec.  
1040.4(a)(2) would require the use of two different contractual 
provisions (the Sec.  1040(a)(2)(i) provision and the Sec.  
1040.4(a)(2)(ii) provision), so lenders would need to use two separate 
loan agreements: one for loans the lender makes directly and one for 
loans obtained from dealers or other financial institutions. The 
commenter asked the Bureau to replace the 4(a)(2)(i) and 4(a)(2)(ii) 
provisions with a single provision that lenders in its predicament 
could use. The commenter also asserted that replacing the proposed 
4(a)(2)(i) and (ii) provisions with a single provision would reduce 
consumer confusion.
    Further, several Tribal commenters expressed concerns about 
proposed Sec.  1040.4(a)(2) related to sovereign immunity.\1044\ Tribal 
commenters and participants in the Tribal consultation on the proposal 
expressed concern that this provision could be misconstrued by 
plaintiffs, their attorneys, and courts as a waiver of a Tribal 
government's sovereign immunity from private suit, insofar as they 
explicitly state that consumers may file class actions even if, 
notwithstanding that statement, the Tribal government enjoys sovereign 
immunity from class actions. The commenters stated that requiring 
Tribal governments to use the proposed provision was an affront to 
their sovereign immunity. These commenters stated that the rule should, 
at the very least permit Tribes to use different language that does not 
impinge on or potentially waive their sovereign immunity claims. One 
Tribal commenter suggested specific language.\1045\
---------------------------------------------------------------------------

    \1044\ For a more detailed summary of Tribal comments on 
sovereign immunity, see the section-by-section analysis for Sec.  
1040.3(b)(2), above.
    \1045\ ``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; provided, however, 
this shall not be deemed nor constitute a waiver of the rights, 
privileges and immunities of the Tribe, its Tribal government or any 
affiliate of its Tribal government.''
---------------------------------------------------------------------------

    In addition to comments about Sec.  1040.4(a)(2) generally, the 
Bureau received numerous comments about specific provisions. The Bureau 
received one comment specific to the proposed 4(a)(2)(i) provision. A 
public-interest consumer lawyer commenter recommended that, to improve 
readability, the Bureau revise the provision to read: ``No one can use 
this agreement to stop you from being part of a class action case in 
court. You can file a class action in court or you can be a member of a 
class action filed by someone else.''
    Numerous commenters addressed the optional 4(a)(2)(ii) provision 
specifically. Many of these commenters expressed concern that the 
provision would confuse consumers and suggested that the Bureau modify 
the provision in various ways to make it more understandable. Some 
commenters requested that, where agreements are for both covered and 
non-covered products, the Bureau require providers to indicate, in 
their agreements, which products the Bureau's rule covers and which it 
does not cover. A consumer advocate commenter requested that the Bureau 
require providers to furnish two separate product agreements, one for 
covered products and one for non-covered products. A trade association 
of consumer lawyers suggested that the Bureau either require providers 
to identify which products are covered or to provide separate terms for 
each product. An industry commenter recommended that the Bureau give 
providers the option to disclose which products are subject to the 
provision and which are not. A public-interest consumer lawyer 
commenter requested that, where contracts are for both covered and non-
covered products, the optional 4(a)(2)(ii) provision instead be 
mandatory, because allowing the provider to use the 4(a)(2)(i) 
provision, which implies that all products are covered, would mislead 
the consumer.
    Commenters expressed additional concerns about the provision that 
would be required by proposed Sec.  1040.4(a)(2)(ii) apart from 
concerns related to the potential for consumer confusion. A consumer 
advocate commenter argued that the provision would hurt class action 
plaintiffs by highlighting that the rule's coverage was limited in 
scope, which, according to the commenter, would create a ``roadblock'' 
in the consumer's prosecution of a class action.
    Several comments addressed proposed Sec.  1040.4(a)(2)(iii) 
specifically. A consumer advocate commenter argued that the phrase 
``who later becomes a party'' in the proposed 4(a)(2)(iii)(A) amendment 
unduly limits the amendment's binding effect, relative to the proposed 
4(a)(2)(i) provision, which states that neither the contracting party 
``nor anyone else'' may stop the consumer from being part of a class 
action. The commenter suggested that the Bureau require providers 
entering into pre-existing contracts that do not contain the required 
provision to simply insert the proposed 4(a)(2)(i) provision via an 
amendment. Two commenters--a consumer advocate and a public-interest 
consumer lawyer--argued that the Bureau should require amendments in 
certain scenarios where the proposal would otherwise allow providers to 
send notices. According to the consumer advocate commenter, the Bureau 
should only allow providers to send the notice where the provider 
cannot amend the contract unilaterally, while the other commenter 
similarly thought the Bureau should only permit the notice when 
amendment is ``contractually impossible.'' These commenters argued that 
amendments are superior to notices from a consumer protection 
standpoint because amendments, unlike notices, would bind third 
parties. An industry

[[Page 33367]]

commenter expressed concern that proposed Sec.  1040.4(a)(2)(iii) would 
cause the Bureau's rule to apply to contracts originally entered into 
before the compliance date when they are assigned after the compliance 
date. The commenter asserted that this is problematic because if a pre-
dispute arbitration agreement was valid at origination, it should 
remain valid in perpetuity.
    Other commenters suggested revisions that they believed would 
increase the binding effect of the proposed 4(a)(2)(iii)(B) notice on 
third parties. Two public-interest consumer lawyer commenters expressed 
concern that the notice, unlike the amendment, does not contain the 
phrase ``neither we nor anyone else'' and therefore lacks a prohibition 
against successors to the contract from blocking consumer involvement 
in a class action. One of these commenters suggested that the phrase 
``neither we nor anyone else'' be included in the notice. The other 
commenter suggested that the Bureau revise the first sentence of the 
notice to read: ``No one can use this agreement to stop you from being 
part of a class action case in court. You can file a class action in 
court or you can be a member of a class action filed by someone else.'' 
The commenter also contended that these revisions would improve the 
notice's readability and, for this reason, the amendment should use the 
same language. A consumer advocate commenter asked the Bureau to 
require contracts between providers and third parties to waive the 
third parties' right to rely on pre-dispute arbitration agreements in 
class actions; to require providers to consider the notice to be part 
of the agreement and supply the notice whenever the agreement is 
requested by a third party; to require providers to store a record of 
the notice in the same way it would store an amendment, so that the 
documents, together, would be considered to be the complete agreement; 
and to add language to the notice stating that the provider considers 
its promise to not stop the consumer from being part of a class action 
to be binding on third parties.
The Final Rule
    In furtherance of the Bureau's goal to ensure that consumers can 
seek relief through class actions when they are harmed by providers of 
consumer financial products and services, and based on the findings 
discussed above in Part VI made pursuant to the Bureau's authority 
under section 1028(b), the Bureau is finalizing Sec.  1040.4(a)(2) with 
the modifications described below.
    Final Sec.  1040.4(a)(2)(i) states that, except as permitted by 
Sec.  1040.4(a)(2)(ii) and (iii) and Sec.  1040.5(b), providers shall, 
upon entering into a pre-dispute arbitration agreement for a product or 
service covered by Sec.  1040.3 after the compliance date, ensure that 
the agreement contains the following provision:

    We agree that neither we nor anyone else will rely on 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 filed by someone else.

    The Bureau has made three minor revisions to Sec.  1040.4(a)(2)(i) 
and the required 4(a)(2)(i) provision, compared with the proposal. 
First, the Bureau replaced the term ``use'' with the term ``rely on'' 
to more closely mirror the language in Sec.  1040.4(a)(1).\1046\ As 
such, use of the term ``rely on'' clarifies that the conduct prohibited 
by Sec.  1040.4(a)(1) and the conduct specified by Sec.  1040.4(a)(2) 
are the same.\1047\ Second, in response to the public-interest consumer 
lawyer commenter's suggested revisions to improve readability, the 
Bureau has revised the final sentence of the required 4(a)(2)(i) 
provision to state ``You may file a class action in court or you may be 
a member of a class action filed by someone else'' rather than ``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.'' \1048\ Third, the Bureau has 
corrected a reference to Sec.  1040.5(b) (the temporary exception for 
providers of pre-packaged general-purpose reloadable prepaid card 
agreements).
---------------------------------------------------------------------------

    \1046\ For the same reasons discussed here, the Bureau has made 
this same revision to the optional 4(a)(2)(ii) provision and the 
4(a)(2)(iii) notice, both discussed below.
    \1047\ See also comment 4(a)(1)-1 (provides a non-exclusive list 
of examples of ``reliance'' within the meaning of Sec.  1040.4).
    \1048\ For the same reasons discussed here, the Bureau has made 
this same revision to the optional 4(a)(2)(ii) provision and the 
4(a)(2)(iii) notice.
---------------------------------------------------------------------------

    Final Sec.  1040.4(a)(2)(ii) permits providers, where a pre-dispute 
arbitration agreement is in a contract that applies to multiple 
products or services, and only some of those products or services are 
covered under Sec.  1040.3, to include the following alternative 
contract provision in place of the one required by Sec.  
1040.4(a)(2)(i): \1049\
---------------------------------------------------------------------------

    \1049\ In this provision, the Bureau has moved the limiting 
sentence concerning applicability of the rule to covered products. 
This sentence now appears as the second sentence. The Bureau 
believes this will improve readability because this sentence is more 
directly related to the first sentence in the provision.

    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. The following provision 
applies only to class action claims concerning the products or 
services covered by that Rule: We agree that neither we nor anyone 
else will rely on 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 filed by someone else.

    Final Sec.  1040.4(a)(2)(iii) sets forth how to comply with Sec.  
1040.4(a)(2) where a pre-dispute arbitration agreement existed 
previously between other parties and does not contain either the 
required 4(a)(2)(i) provision or the optional 4(a)(2)(ii) provision. 
Final Sec.  1040.4(a)(2)(iii)(A) states that providers entering into 
such agreements shall either ensure the agreement is amended to contain 
the provision specified in paragraph (a)(2)(i) or (a)(2)(ii) of this 
section or provide any consumer to whom the agreement applies with the 
following written notice:

    We agree not to rely on 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 filed by someone else.

    The provider may add to the written notice the following optional 
language when the pre-dispute arbitration agreement applies to multiple 
products or services, only some of which are covered by Sec.  1040.3: 
``This notice applies only to class action claims concerning the 
products or services covered by the Arbitration Agreements Rule issued 
by the Consumer Financial Protection Bureau.'' The Bureau is permitting 
this optional language in the written notice so that the notice may be 
structured similarly to the optional contract provision in Sec.  
1040.4(a)(2)(ii). Final Sec.  1040.4(a)(2)(iii)(B) states that the 
provider shall ensure that the pre-dispute agreement is amended or 
provide the notice to consumers within 60 days of entering into it.
    Final Sec.  1040.4(a)(2)(iii) differs from the proposal in one 
other key respect: While proposed Sec.  1040.4(a)(2)(iii)(A) included 
specified language for the required amendment that was different from 
the Sec.  1040.4(a)(2)(i) and (2)(ii) provisions, final Sec.  
1040.4(a)(2)(iii)(A) requires providers to ensure their agreements are 
amended to contain either the Sec.  1040.4(a)(2)(i) or (2)(ii) 
provisions. The proposed Sec.  1040.4(a)(2)(iii)(A) amendment differed 
from the proposed Sec.  1040.4(a)(2)(i) and (2)(ii) provisions

[[Page 33368]]

because it contained the phrase ``who later becomes a party.'' The 
Bureau had intended for this phrase to prevent the amendment from 
binding original contracting parties who would not otherwise have been 
covered by the rule--such as providers who contracted with the consumer 
before the compliance date or providers excluded under Sec.  1040.3(b). 
However, the Bureau agrees with the consumer advocate commenter that 
the phrase ``who later becomes a party'' is unduly limiting, given that 
the rule could, in some cases, prevent non-parties from relying on pre-
dispute arbitration agreements.\1050\

    \1050\ For example, where a provider and consumer enter into a 
pre-dispute arbitration agreement after the compliance date, Sec.  
1040.4(a)(1) prohibits a debt collector from relying on that 
agreement in a class action, even though the debt collector would 
not be a party to the arbitration agreement.
---------------------------------------------------------------------------

    Rather than mandating unique language for the amendment containing 
the phrase ``who later becomes a party,'' the Bureau is allowing 
providers to use the Sec.  1040.4(a)(2)(i) or 4(2)(ii) provisions in 
any amendment pursuant to Sec.  1040.4(a)(2)(iii) and is separately 
finalizing Sec.  1040.4(a)(2)(iv)--described in greater detail below--
which would allow providers to add sentences to the required contract 
provision stating, for example, that the provision does not apply to 
parties that entered into the agreement before the compliance date and 
that the provision does not apply to persons excluded under the rule. 
The final rule's approach also benefits providers entering into pre-
existing agreements for both covered and non-covered products and 
services, because they can amend the agreement to include the optional 
Sec.  1040.4(a)(2)(ii) provision. The contractual amendment that would 
have been required by proposed Sec.  1040.4(a)(2)(iii)(A), in contrast, 
included no language pertaining to agreements for both covered and non-
covered products.
    The Bureau also notes that, where a provider is entering into a 
pre-dispute arbitration agreement that existed previously between other 
parties and does not contain either the Sec.  1040.4(a)(2)(i) or 
(2)(ii) provisions, the Bureau expects the provider to comply with 
Sec.  1040.4(a)(2)(iii) by amending the agreement or providing a 
notice. For example, where Lender X enters into a loan agreement 
subject to a pre-dispute arbitration agreement before the compliance 
date, then sells the account to Buyer A after the compliance date, and 
Buyer A chooses to provide the notice (instead of amending the 
agreement), Buyer B--who subsequently purchases the account from Buyer 
A--must either amend the agreement or send the notice under Sec.  
1040.4(a)(2)(iii). This applies to any subsequent buyers as well.
    As in the proposal, providers are required to use the exact 
language of the required 4(a)(2)(i) provision, the optional 4(a)(2)(ii) 
provision, and the 4(a)(2)(iii) notice as applicable. The final rule, 
however, contains three limited exceptions to this general rule. Three 
new provisions--Sec.  1040.4(a)(2)(iv) through (vi)--describe these 
limited exceptions.
    Final Sec.  1040.4(a)(2)(iv) specifies three sentences that 
providers are allowed to add at the end of the 4(a)(2)(i) and 
4(a)(2)(ii) provisions. Final Sec.  1040.4(a)(2)(iv)(A)(1) authorizes 
providers to include the sentence, ``This provision does not apply to 
parties that entered into this agreement before [the compliance 
date].'' \1051\ The Bureau is allowing providers to use this sentence 
to make clear that the 4(a)(2)(i) and 4(a)(2)(ii) provisions do not 
bind parties that entered into the agreement before the compliance 
date. One scenario, among others, in which providers may wish to use 
this sentence is when they are entering into a pre-dispute arbitration 
agreement that existed previously between the consumer and another 
party, and where the other party entered into that agreement with the 
consumer before the compliance date. For example, where a creditor and 
a consumer enter into a loan agreement that includes a pre-dispute 
arbitration agreement before the compliance date, and a debt buyer 
purchases the loan agreement after the compliance date, the debt buyer 
may choose to add the sentence permitted by Sec.  1040.4(a)(2)(iv)(A) 
to clarify that the phrase ``neither we nor anyone else'' in the 
4(a)(2)(i) or 4(a)(2)(ii) provisions does not refer to the original 
creditor.
---------------------------------------------------------------------------

    \1051\ The Bureau will instruct the Office of the Federal 
Register to insert a date certain upon Federal Register publication.
---------------------------------------------------------------------------

    The Bureau also is adding Sec.  1040.4(a)(2)(iv)(A)(2), which 
authorizes providers to include the sentence, ``This provision does not 
apply to products and services first provided to you before [the 
compliance date] that are subject to an arbitration agreement entered 
into before that date.'' \1052\ The Bureau believes this sentence may 
be useful to align the scope of the 4(a)(2) provision with the reach of 
the rule as described in comment 4-1.i.A. As that comment clarifies, if 
a provider became party to a pre-dispute arbitration agreement with a 
consumer before the compliance date, and then provides the consumer 
with any new products or services after the compliance date, the rule 
applies only to these new products or services. The Bureau therefore is 
allowing providers to use the sentence in Sec.  1040.4(a)(2)(iv)(A)(2) 
to clarify that the rule does not apply to other products and services 
that are not newly provided after the compliance date.
---------------------------------------------------------------------------

    \1052\ Id.
---------------------------------------------------------------------------

    Final Sec.  1040.4(a)(2)(iv)(B) authorizes providers to also 
include the sentence, ``This provision does not apply to persons that 
are excluded from the Consumer Financial Protection Bureau's 
Arbitration Agreements Rule.'' The Bureau is allowing providers to use 
this sentence to clarify that the 4(a)(2)(i) or 4(a)(2)(ii) provisions 
do not bind persons that are excluded under Sec.  1040.3(b). One 
scenario, among others, in which providers may wish to use this 
sentence is when entering into a pre-dispute arbitration agreement 
along with excluded persons. The sentence will clarify that the phrase 
``neither we nor anyone else'' in the 4(a)(2)(i) and 4(a)(2)(ii) 
provisions does not refer to excluded persons.
    Final Sec.  1040.4(a)(2)(iv)(C) authorizes providers to also 
include the sentence, ``This provision also applies to the delegation 
provision.'' As discussed above, comment 2(d)-2 to the final rule 
clarifies that a delegation provision is itself a pre-dispute 
arbitration agreement. However, if a provider has included the 4(a)(2) 
contract provision in its pre-dispute arbitration agreement already 
with this additional sentence, the Bureau does not believe it is 
necessary for the 4(a)(2) provision to be included separately in the 
related delegation provision. The added sentence already clarifies that 
the 4(a)(2) provision applies to the delegation provision as well as 
the broader pre-dispute arbitration agreement. Accordingly, Sec.  
1040.4(a)(2)(iv)(C) states that a provider using the sentence specified 
in paragraph (a)(2)(iv)(C) as part of the 4(a)(2)(i) or 4(a)(2)(ii) 
provisions in a pre-dispute arbitration agreement is not required to 
separately insert the 4(a)(2)(i) or 4(a)(2)(ii) provisions into a 
delegation provision that relates to such a pre-dispute arbitration 
agreement. Otherwise, as explained in comment 4(a)(2)-4, if the 
provider uses a delegation provision and does not include the 
additional sentence in Sec.  1040.4(a)(2)(iv)(C), then the provider 
would be required to include the 4(a)(2) provision both in the 
delegation provision as well as in the broader pre-dispute arbitration 
agreement to which it relates.
    Further, the Bureau has added Sec.  1040.4(a)(2)(v) in response to 
the industry commenter that requested that

[[Page 33369]]

providers be permitted to disclose the required contract provisions in 
substance rather than verbatim. The Bureau believes that allowing 
providers to disclose the required provisions in substance would 
undermine the consumer protection benefits of the rule. The Bureau has 
designed the language of the required provisions carefully to convey 
the consumer's rights accurately and, to the extent possible, in plain 
language. The Bureau is concerned that slight linguistic changes that 
may seem innocuous to a provider could dramatically alter the 
provisions' effect. However, the Bureau also recognizes that the 
provisions' use of pronouns could cause confusion if they are 
inconsistent with the way a particular provider uses pronouns in the 
rest of the contract. For this reason, Sec.  1040.4(a)(2)(v) states 
that, in any provision or notice required under Sec.  1040.4(a)(2), if 
the provider uses a standard term in the rest of the agreement to 
describe the provider or the consumer, the provider may use that term 
instead of the term ``we'' or ``you.'' The Bureau also notes that one 
commenter's concern about class action liability for typographical 
errors in compliance with this provision is misplaced because there is 
no private right of action for violations of this part. The Dodd-Frank 
Act authorizes only the Bureau, State attorneys general, and prudential 
regulators to bring enforcement actions for non-compliance with 
regulations issued pursuant to section 1028(b).
    In response to concerns about Tribal sovereign immunity, the Bureau 
has also added Sec.  1040.4(a)(2)(vi), which provides that, in any 
provision or notice required under Sec.  1040.4(a)(2), if a person has 
a genuine belief that sovereign immunity from suit under applicable law 
may apply to any person that may seek to assert the pre-dispute 
arbitration agreement, then the provision or notice may include, after 
the sentence reading ``You may file a class action in court or you may 
be a member of a class action filed by someone else,'' the following 
language: ``However, the defendants in the class action may claim they 
cannot be sued due to their sovereign immunity. This provision does not 
create or waive any such immunity.'' The word ``notice'' may be 
substituted for the word ``provision'' if the language is included in a 
notice. The Bureau notes that, even without this optional language, 
none of the 4(a)(2) provisions would limit a Tribe's sovereign immunity 
from class action lawsuits. Nevertheless, the Bureau is adopting Sec.  
1040.4(a)(2)(vi) to address the Tribal government commenters' concern 
that plaintiffs and courts could misconstrue the 4(a)(2) provisions in 
this fashion.
    As noted above, the Bureau is clarifying that the optional language 
in Sec.  1040.4(a)(2)(vi) may be used when there is a genuine belief 
that sovereign immunity under applicable law may apply. This standard--
``genuine belief''--is derived from case law governing certain rights 
to petition a court, which are discussed further in the section-by-
section analysis of comment 4(a)(1)-2 above. By using this standard to 
describe when the optional provision may be used, the Bureau is 
providing an avenue for persons who may not be certain whether they are 
eligible for the exemption in Sec.  1040.3(b)(2) to preserve any 
sovereign immunity to which they may ultimately be entitled. For 
example, a person may not be certain that that they are entitled to 
immunities under applicable law (such as an entity that works with a 
State or Tribe but might not meet the common law test for being an arm 
of the State or arm of the Tribe), or their immunity might not be based 
on their status as an arm of the Tribe or arm of the State (such as a 
local government in circumstances when it is not an arm of the State).
    Finally, the Bureau is adding Sec.  1040.4(a)(2)(vii) to clarify 
that a provider may provide any provision or notice required by Sec.  
1040.4(a)(2) in a language other than English if the pre-dispute 
arbitration agreement is also written in that other language. This 
clarification is to ensure consumers reading other languages are able 
to understand the required provision or notice. The Bureau did not 
receive comment on proposed comments 4(a)(2)-1 through 4(a)(2)-3, but 
the Bureau is making three technical corrections to these provisions to 
improve clarity. First, the Bureau has added the phrase ``after the 
compliance date set forth in Sec.  1040.5(a)'' to the first sentence of 
comment 4(a)(2)-1, so the comment now provides that Sec.  1040.4(a)(2) 
sets forth requirements only for providers that enter into pre-dispute 
arbitration agreements for a covered product or service after the 
compliance date set forth in Sec.  1040.5(a). 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.'' 
This edit ensures that the comment accurately reflects the requirements 
of the Rule by noting that providers are subject to Sec.  1040.4(a)(2) 
only with respect to pre-dispute arbitration agreements that they enter 
into after the compliance date. Second, the Bureau has revised the 
first sentence of comment 4(a)(2)-2 to reflect that Sec.  
1040.4(a)(2)(iii)(A) requires providers to amend existing agreements to 
include either the 4(a)(2)(i) or the 4(a)(2)(ii) provisions--rather 
than to include an amendment with language unique from those two 
provisions, as specified in the proposal. Third, the Bureau has removed 
the phrase ``stating the provision'' from the first sentence of 
proposed comment 4(a)(2)-3, so the sentence in the comment now provides 
that Sec.  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.'' This 
revision reflects the fact that the written notice contains different 
language than the 4(a)(2)(i) and 4(a)(2)(ii) provisions.
    Additionally, the Bureau is adding comment 4(a)(2)-4 to clarify the 
relationship between comment 2(c)-2, which explains that delegation 
provisions are pre-dispute arbitration agreements within the meaning of 
Sec.  1040.2(c), and Sec.  1040.4(a)(2), which requires providers to 
include specified language in their pre-dispute arbitration agreements. 
Comment 4(a)(2)-4 clarifies that if a provider has included in its pre-
dispute arbitration agreement the language required by Sec.  
1040.4(a)(2), and the provider's pre-dispute arbitration agreement 
contains a delegation provision, the provider must include the language 
required by Sec.  1040.4(a)(2) in the delegation provision itself. Thus 
the 4(a)(2) provision must be included in two places--in both the 
delegation provision and the pre-dispute arbitration agreement to which 
it relates--unless the latter pre-dispute arbitration agreement 
includes the 4(a)(2) provision and the optional sentence specified in 
Sec.  1040.4(a)(2)(iv)(C) discussed above. In that case, the provider 
need not include the 4(a)(2) provision separately within the delegation 
provision.
    As described above, the Bureau received several comments on 
proposed Sec.  1040.4(a)(2) generally (as opposed to comments on its 
individual provisions). In response to the State regulator commenter 
that requested clarification, the Bureau affirms that, based on the 
plain meaning of the regulatory text, the 4(a)(2) provisions apply not 
only to class actions brought under Federal and State consumer 
protection laws, but to any class actions brought against providers 
concerning covered products and services. In response to the industry

[[Page 33370]]

commenter's concern, the Bureau affirms that inclusion of a 4(a)(2) 
provision in a pre-dispute arbitration agreement should not constitute 
a waiver of any defenses that a company may assert in a class action, 
including defenses to class certification, that are unrelated to the 
pre-dispute arbitration agreement.
    In response to the industry commenter that requested that the final 
rule state expressly that proposed Sec.  1040.4(a)(2) does not apply to 
any transaction that originated with an excluded person pursuant to 
proposed Sec.  1040.3(b), the Bureau declines to revise Sec.  
1040.4(a)(2) in this manner because it would be inconsistent with the 
overall framework of the rule. Under the rule, agreements that 
initially originated between a consumer and an excluded person can 
become subject to Sec.  1040.4 generally in two situations: First, 
where an agreement was initially entered into by an excluded person 
before the compliance date and then entered into by a provider after 
the compliance date, and second, where an agreement was initially 
entered into by an excluded person after the compliance date and then 
relied on by a provider.\1053\
---------------------------------------------------------------------------

    \1053\ The Bureau addresses the commenter's broader comment--
that the Bureau is exceeding its authority by effectively regulating 
automobile dealers--in the section-by-section analysis of Sec.  
1040.3(a) above.
---------------------------------------------------------------------------

    The Bureau also declines, in response to the consumer advocate's 
comment, to reframe the 4(a)(2) provisions as express relinquishments 
of a provider's right to use the contract to stop the consumer from 
being part of a class action. The Bureau notes that it has not framed 
the required contract provisions in the proposal and final rule in 
terms of rights; instead, the provisions constitute an agreement not to 
undertake specified conduct. The Bureau believes that the framing of 
the rule affords consumers the intended protections and allows for 
those protections to be stated in plain language.
    The Bureau further declines to adopt additional disclosure 
requirements in response to the comment from the trade association of 
lawyers who represent investors. In response to the association's 
recommendations that the Bureau require providers to include a 4(a)(2) 
provision in all pre-dispute arbitration agreements and send a separate 
notice containing the language to consumers with existing agreements, 
the Bureau believes that this requirement would impact some pre-dispute 
arbitration agreements that are beyond the scope of agreements covered 
by section 1028. Moreover, the Bureau does not believe that specific 
disclosure requirements (e.g., for font size) would better protect 
consumers.\1054\ Furthermore, the Bureau has not observed a trend of 
providers using contract design to diminish the importance of consumer-
friendly provisions in arbitration agreements. The Bureau also declines 
to impose a general requirement that providers include the relevant 
4(a)(2) provision on their Web sites. The Bureau believes inclusion of 
the provision in pre-dispute arbitration agreements is sufficient to 
effectuate the purposes of Sec.  1040.4(a)(2). Of course, if the 
provider's pre-dispute arbitration agreement is on a Web site, the rule 
still applies to a pre-dispute agreement that is posted on a Web site. 
As explained in comment 2(c)-3, the term pre-dispute arbitration 
agreement is not specific to any particular form or structure.
---------------------------------------------------------------------------

    \1054\ See infra Part VIII (responding to comments on potential 
alternatives suggested by commenters).
---------------------------------------------------------------------------

    The Bureau also declines to require providers to identify in their 
agreements which products are covered or to provide separate contracts 
for covered and non-covered products. The Bureau believes that these 
requirements would be significantly more burdensome than inserting a 
provision supplied by the Bureau. At the same time, the benefits to 
consumers from such requirements would be limited. The Bureau 
acknowledges that, where a contract is for both covered and non-covered 
products, it may not be immediately apparent to most consumers which 
products are subject to the provision. However, the Bureau believes 
that consumers can obtain this information, for example, by reviewing 
any information the provider voluntarily provides in the agreement 
about these products (as discussed below), by contacting their provider 
or by checking the Bureau's Web site for more information about the 
scope of the rule. The Bureau also notes that the 4(a)(2)(ii) provision 
is intended to communicate the consumer's dispute resolution rights not 
only to the consumer, but also courts and third parties such as 
potential purchasers, which are likely to either know which products 
are covered or conduct an appropriate analysis to make an informed 
determination.
    The Bureau also declines to make use of the 4(a)(2)(ii) provision 
mandatory when a contract is for both covered and non-covered products 
and services. The Bureau believes that most providers will have a 
strong incentive to use the optional 4(a)(2)(ii) provision instead of 
the 4(a)(2)(i) provision, because it will make clear to consumers, 
attorneys, and judges that the provision applies only to class action 
claims concerning covered products. A provider of a covered and a non-
covered product could use the language in 4(a)(2)(i). Although that 
would not be required by the rule, if they did so, that language may 
apply to the non-covered product as well. As a result, the Bureau 
believes that most providers providing covered and non-covered products 
will use the optional 4(a)(2)(ii) provision.
    The Bureau further notes, in response to the industry commenter's 
recommendation that providers be given the option to disclose which 
products are subject to the provision and which are not, nothing in 
Sec.  1040.4(a)(2) would prevent providers from including this 
information in their arbitration agreements; indeed, the Bureau 
encourages providers to do so.
    The Bureau also declines to replace the 4(a)(2)(i) and 4(a)(2)(ii) 
provisions with a single provision, as an industry commenter suggested. 
The Bureau believes that, where a contract is for both covered and non-
covered products, the rule should permit providers to use the optional 
4(a)(2)(ii) provision because that language is consistent with the 
scope of the rule as well as the scope of section 1028. The Bureau also 
does not believe, as the commenter suggested, that Sec.  1040.4(a)(2) 
would effectively require lenders to use separate loan agreements for 
loans that lenders make directly and loans obtained from dealers or 
other financial institutions.
    In response to the consumer advocate commenter's concern that the 
optional 4(a)(2)(ii) provision would create additional hurdles for 
consumers in class actions by explicitly addressing the issue of 
coverage, the Bureau disagrees. The Bureau would not characterize the 
question of coverage as a hurdle for consumers as application of a law 
or regulation can be an appropriate threshold question in any 
litigation. Providers may raise it to the extent they deem it relevant 
and courts will address it regardless of which provision the 
contracting party uses.
    With respect to proposed Sec.  1040.4(a)(2)(iii), the Bureau 
declines to require providers to amend their agreements--instead of 
sending the optional notice--wherever providers have the authority to 
amend their agreements unilaterally or wherever amending the agreement 
is not ``contractually impossible.'' The Bureau believes this approach 
would be burdensome to providers, because it may not be clear whether a 
provider can unilaterally change the terms. The Bureau further notes 
that, even where providers send the notice instead of

[[Page 33371]]

amending the agreement, many third parties--such as debt collectors--
would still be subject to the prohibition in Sec.  1040.4(a)(1). In 
addition, the Bureau declines to revise proposed Sec.  
1040.4(a)(2)(iii) in response to an industry commenter's concern that 
the requirement to amend contracts or provide the notice effectively 
makes the rule ``retroactive.'' This rule has no retroactive effect; 
Sec.  1040.4(a)(2)(iii) would only apply once a provider enters into an 
agreement after the compliance date.
    Additionally, the Bureau declines to take additional steps that 
several commenters suggested would increase the binding effect of the 
notice on third parties. The Bureau declines to use the phrase 
``neither we nor anyone else'' or ``no one'' in the notice because it 
is not possible for a notice to bind third parties and it would be 
misleading to suggest otherwise to consumers. The Bureau also declines 
to require contracts between providers and third parties to waive the 
third parties' right to rely on pre-dispute arbitration agreements in 
class actions, because Dodd-Frank section 1028(b) authorizes the Bureau 
to regulate the use of an agreement ``between a covered person and a 
consumer.'' The Bureau further declines to require that providers 
``consider the notice to be part of the agreement;'' supply the notice 
whenever the agreement is requested by a third party; store a record of 
the notice in the same way the provider would store an amendment so 
that the documents together would be considered the complete agreement; 
or add language to the notice stating that the provider considers its 
promise to not stop the consumer from being part of a class action to 
be binding on third parties. Such requirements would effectively 
transform the notice into an amendment, and, for the reasons described 
in the previous paragraph, the Bureau declines to require providers to 
amend the agreement in situations where it has permitted a notice.
    The Bureau also declines to forbid providers from relying on 
arbitration agreements in individual suits if the provider has not 
included the required contract provision or to state that non-compliant 
arbitration agreements may not be severed or reformed after litigation 
has commenced. Because the Bureau's Study showed that providers rarely 
face individual suits, the Bureau does not believe that banning 
reliance on non-compliant arbitration agreements in such suits would 
meaningfully change providers' incentives to include the required 
contract provision. Further, the Bureau believes that title X 
penalties--which the Bureau and State attorneys general may seek for 
violations of the rule, including failure to include the required 
provision--will adequately deter potential violations.\1055\
---------------------------------------------------------------------------

    \1055\ See 12 U.S.C. 5565.
---------------------------------------------------------------------------

    Finally, the Bureau declines to add a provision stating that non-
compliant arbitration agreements are null and void. Where a provider 
fails to comply with the rule by omitting the contract provision 
required by Sec.  1040.4(a)(2), Sec.  1040.4(a)(1) still prevents the 
provider from relying on an arbitration agreement in a class action. 
For this reason, declaring that a non-compliant pre-dispute arbitration 
agreement is null and void, and thus unenforceable, would not be 
necessary because pursuant to Sec.  1040.4(a)(1), the agreement is 
already unenforceable with respect to class actions. Further, the 
Bureau believes that providers will be deterred from intentionally 
omitting the required contract provision because such an omission would 
violate the rule and subject the provider to title X penalties.
Comments on the Bureau's Interpretation of ``Entered Into''
The Bureau's Proposal
    Dodd-Frank section 1028(d) states that any rule prescribed by the 
Bureau under section 1028(b) shall apply to any pre-dispute arbitration 
agreement ``entered into'' after the compliance date. Consistent with 
section 1028(d), proposed Sec.  1040.4(a)(1), Sec.  1040.4(a)(2), and 
Sec.  1040.4(b) used the term ``entered into'' or ``entering into'' to 
describe when the requirements imposed by those provisions would begin 
to apply to a particular agreement.\1056\ To aid interpretation of 
proposed Sec.  1040.4, the Bureau proposed a series of examples in 
comment 4-1 of what would have and would not have constituted 
``entering into'' a pre-dispute arbitration agreement for purposes of 
the proposal. The Bureau also stated in the proposal that it 
interpreted the phrase ``entered into'' in section 1028(d) generally to 
include any circumstance in which a person agrees to undertake 
obligations or gains rights in an agreement. The Bureau stated in the 
proposal that it believed that this interpretation best effectuated the 
purposes of section 1028, was practical and clear in its meaning, and 
was reasonable.
---------------------------------------------------------------------------

    \1056\ As later noted, the phrase ``entered into an agreement'' 
as used in section 1028 could be interpreted more broadly than the 
Bureau has proposed to interpret the phrase for purposes of the 
proposal.
---------------------------------------------------------------------------

    Proposed comment 4-1.i would have provided three illustrative 
examples of when a provider enters into a pre-dispute arbitration 
agreement. First, proposed comment 4-1.i.A would have explained that a 
provider enters into a pre-dispute arbitration agreement where it 
provides to a consumer a new product that is subject to a pre-dispute 
arbitration agreement, and the provider is a party to the agreement. 
The Bureau stated in the proposal that it did not interpret this 
example to include new charges on a credit card covered by a pre-
dispute arbitration agreement entered into before the compliance date. 
Second, proposed comment 4-1.i.B would have explained 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 have explained that a provider enters into a pre-dispute 
arbitration agreement where it adds a pre-dispute arbitration agreement 
to an existing product. The Bureau stated in the proposal that it 
interpreted Dodd-Frank section 1028(b) to authorize 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 comment 4-1.ii would have provided two illustrative 
examples of when a provider does not enter into a pre-dispute 
arbitration agreement. First, proposed comment 4-1.ii.A would have 
stated that a provider does not enter into a pre-dispute arbitration 
agreement where it modifies, amends, or implements the terms of a 
product that is subject to a pre-dispute arbitration agreement entered 
into before the compliance date. In the proposal, the Bureau stated 
that it believed that the phrase ``entered into an agreement'' as used 
in section 1028 could 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, the 
Bureau proposed to interpret the phrase more narrowly for purposes of 
the proposal. The Bureau solicited 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

[[Page 33372]]

and what the impacts of such an interpretation would be.
    The Bureau noted in the proposal that comment 4-1.ii.A would 
include a provider's modification, amendment, or implementation of the 
terms of a pre-dispute arbitration agreement itself. The Bureau also 
stated, however, that a provider enters into a pre-dispute arbitration 
agreement where the modification, amendment, or implementation 
constituted the provision of a new covered product.\1057\
---------------------------------------------------------------------------

    \1057\ See proposed comment 4-1.i.A (stating 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).
---------------------------------------------------------------------------

    Second, proposed comment 4-1.ii.B would have stated 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 agreement but does not become a party to that agreement.
    Proposed comment 4-2 would have clarified that Sec.  1040.4(a)(1) 
applies to a provider even where the provider itself does not enter 
into a pre-dispute arbitration agreement. Proposed comment 4-2.i would 
have explained that, under Sec.  1040.4(a)(1), a provider cannot rely 
on a pre-dispute arbitration agreement entered into by another person 
after the compliance date with respect to any aspect of a class action 
concerning a covered product.\1058\ The comment would have then 
clarified that, under Sec.  1040.4(b), such providers may be required 
to submit certain specified records related to claims filed in 
arbitration pursuant to pre-dispute arbitration agreements. The comment 
then would have cross-referenced comment 4(a)(2)-1, which would have 
noted that Sec.  1040.4(a)(2) does not apply to providers that do not 
enter into pre-dispute arbitration agreements.
---------------------------------------------------------------------------

    \1058\ Proposed comment 4-2 referred to the effective date 
rather than the compliance date. As discussed below, the Bureau has 
corrected this error in the final rule.
---------------------------------------------------------------------------

    Proposed comment 4-2.ii would have illustrated comment 4-2.i with 
an example. The proposed comment would have stated that, where 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 after the compliance date with respect to any aspect of a 
class action filed against the debt collector concerning its covered 
debt collection products or services. The comment would have then noted 
that, similarly, Sec.  1040.4(a)(1) prohibits 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) after the compliance 
date.
Comments Received
    The Bureau received several comments on proposed comment 4-1. More 
than two dozen commenters--primarily consumer advocates, consumer law 
firms, public-interest consumer lawyers, and nonprofits--urged the 
Bureau to expand its interpretation of ``entered into'' such that 
product agreements entered into before the compliance date would be 
subject to Sec.  1040.4 if modified after the compliance date.\1059\ 
The primary rationale offered by commenters was that this approach 
would benefit consumers by increasing the number of agreements that 
would be subject to the rule over time, relative to the approach the 
Bureau proposed. Commenters offered numerous examples of contractual 
modifications that they believed should trigger the rule's application, 
including, among other things, amendments to the pre-dispute 
arbitration agreement, pricing changes, and the addition of language 
regarding class actions. Some commenters stated that ``material'' 
modifications should trigger the rule's coverage, while other 
commenters referred to contractual modifications generally.\1060\ 
Another commenter, a consumer law firm, requested that the Bureau 
interpret ``entered into'' such that a provider enters into an 
agreement when it modifies a pre-dispute arbitration agreement, but not 
when it modifies the other terms of the contract. The commenter stated 
that this approach would deter providers from amending their pre-
dispute arbitration agreements after the compliance date to add class 
actions waivers.
---------------------------------------------------------------------------

    \1059\ Commenters used a variety of terms to refer to the 
contractual change, including ``modification,'' ``amendment,'' and 
``material change.'' Although each of these terms may have discrete 
meanings under contract law, for the purposes of this rule, the 
Bureau views these terms as interchangeable and is using the term 
``modification'' in this section for the sake of simplicity.
    \1060\ Commenters offered numerous examples of contractual 
changes they believed would be ``material,'' including pricing 
changes, the addition of language regarding class actions, the 
addition of requirements that the consumer waive legal rights, 
changes to the State law governing the agreement, and the addition 
of a new party or co-signer (not just an authorized user). One 
consumer advocate commenter suggested that the Bureau add to the 
commentary a non-exhaustive list of amendments that would be 
considered material.
---------------------------------------------------------------------------

    A nonprofit commenter and a consumer advocate commenter recommended 
that the Bureau interpret ``entered into'' yet more expansively. The 
nonprofit commenter recommended that the Bureau subject all agreements 
to the rule, regardless of when they were entered into. The consumer 
advocate commenter stated that after a period of no more than one year, 
all existing contracts should be subject to the rule.
    In contrast, an industry commenter stated that the final rule 
should adopt the proposal's approach to this issue by retaining comment 
4-1.ii.A as proposed. Another commenter, a public-interest consumer 
lawyer, recommended that the Bureau remove proposed comment 4-1.ii.A 
and leave the question of whether modifications constitute ``entering 
into'' to the courts when they have occasion to interpret part 1040.
    In addition, a number of commenters addressed the relationship 
between proposed comments 4-1.i.A and 4-1-ii.A,\1061\ including the 
Bureau's statement in the proposal's section-by-section analysis that a 
provider enters into a pre-dispute arbitration agreement where a 
contractual modification constitutes the provision of a new covered 
product. Some industry commenters asserted that contractual 
modifications should not cause the rule to apply even if they 
constitute the provision of a new product. These commenters also asked 
the Bureau to clarify its view as to what types of contractual 
modifications would constitute the provision of a new product. One of 
these industry commenters stated that agreements should not be subject 
to the rule as long as the underlying product continues to serve the 
purpose for which the consumer originally entered into the agreement. 
(The commenter also asserted that, for this reason, agreements should 
not be subject to the rule when they are sold or assigned, even when 
modified in a manner that constitutes the provision of a new product.) 
Further, one industry commenter and one consumer advocate commenter 
asked the Bureau to clarify whether, if a contract is amended in a 
manner that

[[Page 33373]]

constitutes the provision of a new product, the rule would apply only 
with respect to the new product or whether it would also apply to the 
existing product. The industry commenter stated that, in this scenario, 
the rule should apply only with respect to the new product, while the 
consumer advocate commenter stated that the rule should apply with 
respect to existing products as well.
---------------------------------------------------------------------------

    \1061\ Proposed comment 4-1.i.A would have stated 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 
such an agreement, and the provider is a party to that agreement. 
Proposed comment 4-1.ii.A would have stated 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.
---------------------------------------------------------------------------

    Other commenters addressed the proposal's application to acquirers 
and purchasers of covered products. An industry commenter stated that a 
provider who was not a party to the original agreement between a 
company and a consumer should not be subject to the rule, even if the 
provider acquires or purchases a covered product after the compliance 
date or if the product agreement states that third parties (such as 
purchasers and assignees) may enforce the agreement. According to the 
commenter, such a third party already had rights in the arbitration 
agreement before the compliance date; therefore, the agreement is not 
newly entered into as to that third party. Another industry commenter 
stated that pre-dispute arbitration agreements originally entered into 
by excluded persons, such as automobile dealers, should not be subject 
to the rule when entered into by providers after the compliance date 
because, according to the commenter, the enforceability of a contract 
provision cannot depend on the identity of the party enforcing it. An 
industry commenter asked the Bureau to clarify how the rule would apply 
where a bank acquires another institution after the compliance date and 
account holders might receive a new account agreement from the 
acquiring institution. A trade association of consumer lawyers stated 
that the rule should cover providers that receive assignments of 
contracts. Another trade association of consumer lawyers stated that it 
supported the Bureau's proposed application of the rule to acquirers 
and purchasers.
    Other commenters expressed concerns about comment 4-1.ii.B.\1062\ 
Two public-interest consumer lawyers expressed concern that comment 4-
1.ii.B would exempt non-party acquirers from Sec.  1040.4 altogether, 
even though such entities seek to enforce pre-dispute arbitration 
agreements. A consumer advocate commenter expressed concern that 
comment 4-1.ii.B would enable acquirers and purchasers to evade 
coverage where the original provider ``de-coupled'' its product 
agreements and arbitration agreements--e.g., by providing the 
arbitration agreement in a separate document--and transferred only the 
product agreement to the acquirer or purchaser. The commenter argued 
that an acquirer or purchaser in this type of transaction could still 
rely on the pre-dispute arbitration agreement, if the product agreement 
would remain subject to it. But, the commenter asserted that under 
proposed comment 4-1.ii.B, the acquirer or purchaser would not enter 
into the arbitration agreement because it would not become a party to 
the arbitration agreement--enabling the acquirer or purchaser to avoid 
coverage (at least where the contract had been entered into before the 
compliance date).
---------------------------------------------------------------------------

    \1062\ Proposed comment 4-1.ii.B would have stated that a party 
does not enter into a pre-dispute arbitration agreement where it 
acquires or purchases a product that is subject to such an agreement 
but does not become a party to that agreement.
---------------------------------------------------------------------------

    Finally, a consumer advocate commenter expressed concern about the 
first sentence of proposed comment 4-1, which prefaced the comment's 
examples of when providers do and do not enter into agreements for 
purposes of proposed Sec.  1040.4 by stating, ``Section 1040.4 applies 
to providers that enter into pre-dispute arbitration agreements after 
the [compliance date].'' The commenter asserted that this sentence is 
inaccurate because proposed Sec.  1040.4(a)(1) would have applied to 
providers that do not themselves enter into pre-dispute arbitration 
agreements.\1063\ The commenter suggested that the Bureau remove the 
phrase ``providers that enter into'' from this sentence. The same 
commenter also requested that the final rule adopt each of the examples 
in proposed comments 4-1.i and 4-2. Additionally, a public-interest 
consumer lawyer stated that it agreed with the Bureau's statement in 
the proposal's preamble that 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.
---------------------------------------------------------------------------

    \1063\ See proposed comment 4-2 (describing how proposed Sec.  
1040.4 would have applied to providers that do not enter into pre-
dispute arbitration agreements).
---------------------------------------------------------------------------

The Final Rule
    Having considered the issues raised by commenters, the Bureau is 
finalizing comments 4-1 and 4-2, containing its interpretation of the 
term ``entered into'' in this Part with certain modifications as 
described below.
    The Bureau continues to interpret the phrase ``entered into'' in 
Dodd-Frank section 1028(d) as generally including circumstances in 
which a person agrees to undertake obligations or gains rights in an 
agreement. However, the Bureau notes that the rule does not treat every 
conceivable circumstance in which a person gains rights in a pre-
dispute arbitration agreement to constitute entering into the 
agreement. For example, a person who is not a party to an agreement but 
is entitled to use the agreement may gain third-party beneficiary 
rights, but as discussed in the section-by-section analysis of comments 
4-1 and 4-2 below, that person would not generally be entering into the 
pre-dispute arbitration agreement for purposes of the rule.
    The Bureau is adopting the examples in comment 4-1 largely as 
proposed, but with some additional clarifications as described below. 
As in the proposal, comment 4-1.i provides three illustrative examples 
of when a provider enters into a pre-dispute arbitration agreement 
after the compliance date for purposes of Sec.  1040.4. Comment 4-1.i.A 
explains that a provider enters into a pre-dispute arbitration 
agreement when it provides to a consumer, after the compliance date, a 
new product or service covered by Sec.  1040.3(a) that is subject to a 
pre-existing agreement to arbitrate future disputes between the 
parties, and the provider is a party to that agreement, regardless of 
whether that agreement predates the compliance date.\1064\ The comment 
further clarifies that, in such cases, Sec.  1040.4 applies only with 
respect to the new product or service. Comment 4-1.i.B explains that a 
provider enters into a pre-dispute arbitration agreement where it 
acquires or purchases a covered product or service after the compliance 
date that is subject to a pre-dispute arbitration agreement and becomes 
a party to that pre-dispute arbitration agreement or to the agreement 
for the consumer financial product or service, even if the seller is 
excluded from coverage under Sec.  1040.3(b) or the pre-dispute 
arbitration agreement was entered into before the compliance date. 
Comment 4-1.i.C explains that a provider enters into a pre-dispute 
arbitration agreement where it adds a pre-dispute arbitration agreement 
after the compliance date to an existing product or service.\1065\
---------------------------------------------------------------------------

    \1064\ As the Bureau stated in the proposal, it does not 
interpret this example to include new charges on a credit card 
covered by a pre-dispute arbitration agreement entered into before 
the compliance date.
    \1065\ See also comment 2(c)-2 (clarifying that a delegation 
provision is a pre-dispute arbitration agreement). If a provider 
adds a delegation provision to a pre-existing pre-dispute 
arbitration agreement, the rule would apply to the delegation 
provision.
---------------------------------------------------------------------------

    Further, as in the proposal, comment 4-1.ii provides two 
illustrative

[[Page 33374]]

examples of when a provider does not enter into a pre-dispute 
arbitration agreement for purposes of Sec.  1040.4. Comment 4-1.ii.A 
states 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 without engaging in the conduct described in comment 4-1.i 
after the compliance date. The comment clarifies that a provider does 
enter into a pre-dispute arbitration agreement, however, when the 
modification, amendment, or implementation constitutes the provision of 
a new product or service. Comment 4-1.ii.B states that a provider does 
not enter into a pre-dispute arbitration agreement where it acquires or 
purchases a product or service that is subject to a pre-dispute 
arbitration agreement but does not become a party to any pre-dispute 
arbitration agreement that applies to the product or service.
    Final comment 4-1 differs from the proposal in several respects. 
First, the Bureau has deleted the first sentence of proposed comment 4-
1 (``Section 1040.4 applies to providers that enter into pre-dispute 
arbitration agreements after the [compliance date].''). The Bureau 
agrees with the consumer advocate commenter that the sentence would be 
inaccurate, given that Sec.  1040.4(a)(1) applies to providers that do 
not themselves enter into pre-dispute arbitration agreements.\1066\
---------------------------------------------------------------------------

    \1066\ See Comment 4-2 (describing how Sec.  1040.4 applies to 
providers that do not enter into pre-dispute arbitration 
agreements).
---------------------------------------------------------------------------

    Second, the Bureau is adding additional clarifying language to 
comments 4-1.i.A and 4-1.i.B. This language clarifies an important 
aspect of the rule: That, for purposes of the rule, a provider enters 
into an agreement in the scenarios described in those comments even if 
the arbitration agreement was originally entered into before the 
compliance date. Therefore, final comment 4-1.i.A explains that when a 
person, before the compliance date, enters into an agreement to 
arbitrate future disputes with a consumer, and then provides the 
consumer with a new product that is subject to that agreement after the 
compliance date, the provider would be considered to be entering into 
that arbitration agreement for the new product after the compliance 
date for purposes of Sec.  1040.4. Similarly, under final comment 4-
1.i.B, when a person and consumer enter into a pre-dispute arbitration 
agreement for a product described in Sec.  1040.3(a) before the 
compliance date, and a provider acquires or purchases the product after 
the compliance date (and becomes a party to that arbitration 
agreement), the acquiring or purchasing provider would be considered to 
be entering into the pre-dispute arbitration agreement for purposes of 
Sec.  1040.4.
    The Bureau is adopting these interpretations to clarify that 
providers cannot avoid application of the rule after the compliance 
date by linking new products or newly-acquired or newly-purchased 
products with arbitration agreements that predate the compliance date 
and purport to govern the provider's future relationship with the 
consumer. This language clarifies that when providing new products 
after the compliance date, providers will need to review their product 
agreements that predate the compliance date to determine whether the 
new product agreement is subject to a pre-existing pre-dispute 
arbitration agreement that was not subject to the rule. The Bureau 
notes that providers can alleviate any burden with respect to this 
review either by inserting language in the new product agreement 
stating that the new product agreement is not subject to arbitration, 
or by including the rule's required contract provision with respect to 
that new product so that, in effect, the provider is amending the 
application of any earlier arbitration agreement to the new product or 
service.
    Third, the Bureau has revised comment 4-1.ii.A to clarify the 
relationship between comments 4-1.i.A and 4-1.ii.A. In the preamble to 
the proposal, the Bureau noted that, even though a provider does not 
enter into a pre-dispute arbitration agreement where it modifies the 
terms of a product, a provider does enter into a pre-dispute 
arbitration agreement where the modification constitutes the provision 
of a new product. The Bureau believes this explanation would better aid 
compliance if it is in the commentary because it addresses what some 
commenters viewed as an apparent conflict between two other provisions 
of the commentary. To address concerns raised by commenters, final 
comment 4-1.i.A also includes an additional sentence clarifying that, 
where a contractual modification constitutes the provision of a new 
product, Sec.  1040.4 applies only with respect to the new product. The 
Bureau believes this interpretation strikes the appropriate balance 
between preserving the consumer protections available for new products 
and preserving reliance and expectations with respect to existing 
products.
    The Bureau declines to adopt commenters' recommendation that 
contractual modifications should not constitute ``entering into'' even 
if they constitute the provision of a new product. The Bureau does not 
agree with the industry commenter that stated that agreements 
originally entered into before the compliance date should always 
continue to be exempt, even if modified after the compliance date, as 
long as the underlying product continues to serve the purpose for which 
the consumer originally entered into the agreement. Dodd-Frank section 
1028(d) authorizes any regulation issued by the Bureau under section 
1028(b) to apply to any agreement between a consumer and covered person 
entered into after the compliance date. The Bureau believes that, when 
a provider provides a new product or service after the compliance date, 
the pre-dispute arbitration agreement for that product is entered into 
at that time with respect to that new product or service, regardless of 
whether the pre-dispute arbitration agreement had been entered into 
previously with respect to other products or services. Thus, section 
1028(d) authorizes the Bureau to apply the rule, as to that new product 
or service, at that time. Further, the approach recommended by the 
industry commenter would undermine coverage of new agreements. Were the 
Bureau to adopt the approach recommended by the three industry 
commenters, providers could potentially evade the rule in perpetuity, 
with respect to existing consumers, by providing new products to their 
existing consumers through what such providers would assert are 
modifications of existing contracts. With respect to the comments that 
asked the Bureau to clarify what types of contractual modifications 
would, in its view, constitute the provision of a new product, the 
Bureau believes that such modifications include, without limitation, 
those that result in the provision of a new account (such as a deposit 
account or credit card account) or a new closed-end credit 
transaction.\1067\
---------------------------------------------------------------------------

    \1067\ For instance, Regulation Z sets out rules for when a new 
closed end consumer credit transaction occurs for purposes of 
determining whether new disclosures are required. See, e.g., 12 CFR 
1026.20(a) and comment 20(a)-1 (``A refinancing is a new transaction 
requiring a complete new set of disclosures. Whether a refinancing 
has occurred is determined by reference to whether the original 
obligation has been satisfied or extinguished and replaced by a new 
obligation, based on the parties' contract and applicable law.'').
---------------------------------------------------------------------------

    Fifth, to conform to the rest of the regulatory text and 
commentary, the Bureau has revised comment 4-1.i.B and 4-1.ii.B to use 
the term ``product or service''--not simply ``product,'' as in the 
proposal.

[[Page 33375]]

    The Bureau declines to expand its interpretation of ``entered 
into'' for purposes of Sec.  1040.4 to include situations where a 
provider purchases or acquires a product that is subject to a pre-
dispute arbitration agreement, but does not become party to the pre-
dispute arbitration agreement. The Bureau recognizes that sellers of 
loans may place two separate agreements into two different documents--a 
product agreement and a pre-dispute arbitration agreement. The Bureau 
understands this ``de-coupling'' may be common in automobile finance, 
for example. The Bureau also recognizes that buyers may purchase or 
acquire the product agreement and become a party to that agreement, 
without purchasing the pre-dispute arbitration agreement or becoming 
party to that agreement. In these circumstances, the buyer may become a 
third-party beneficiary to the pre-dispute arbitration agreement. 
However, the Bureau disagrees that, by not treating such a buyer to be 
entering into the pre-dispute arbitration agreement, the rule 
encourages evasions. Such a buyer does not, in fact, evade the rule. 
The buyer, though not entering into the pre-dispute arbitration 
agreement, nonetheless remains subject to the rule against reliance in 
a class action in Sec.  1040.4(a)(1), which generally applies to a 
provider regardless of whether it has entered into the pre-dispute 
arbitration agreement. The provider would also be required to submit 
certain specified records concerning claims filed in arbitration 
pursuant to such pre-dispute arbitration agreements. While such a buyer 
would not be subject to the contract provision or notice requirements 
in Sec.  1040.4(a)(2), the Bureau does not believe that is an evasion 
of the rule. That outcome is, rather, a natural reflection of the 
position the buyer is in vis-[agrave]-vis the pre-dispute arbitration 
agreement. Moreover, making the buyer subject to Sec.  1040.4(a)(2) in 
these circumstances would be inconsistent with the rule's overall 
approach to coverage of third parties, such as debt collectors who are 
hired by a creditor and may acquire third-party beneficiary rights 
under a pre-dispute arbitration agreements.
    The Bureau also declines to expand its interpretation of ``entered 
into'' for purposes of Sec.  1040.4 such that agreements entered into 
before the compliance date would become subject to the rule if modified 
in ways that do not constitute the provision of a new product. As 
discussed above, numerous commenters asserted that that this approach 
would benefit consumers by increasing the number of agreements that 
would be subject to the rule over time, relative to the Bureau's 
proposed approach. The Bureau believes, however, that this would not 
yield such significant consumer protection benefits to warrant the 
additional complexity and uncertainty that such a standard would 
create.
    First, this approach would not benefit consumers in markets for 
most covered products. The Bureau understands that product agreements 
for many covered products are not typically modified after they are 
entered into. (For example, agreements for closed-end credit products 
are rarely modified, and products that are provided on a one-time basis 
do not allow for an opportunity to amend the agreement). For the 
remaining products--among which credit cards and checking accounts are 
the most significant in terms of market size--the Bureau lacks data on 
the frequency of contractual modifications (and commenters did not cite 
any such data). However, regardless of how frequently modifications 
occur, the Bureau believes that the rule will apply to a significant 
majority of consumer agreements within a relatively brief period, even 
if the Bureau does not expand its interpretation of ``entered into'' to 
include modifications, due to the frequency of account turnover in 
these markets.\1068\ Further, the Bureau believes that even those 
consumers who maintain older accounts to which the rule does not apply 
will benefit from the rule because of the rule's deterrent effect. Due 
to the frequency of account turnover, it often will not be long before 
a critical mass of a provider's consumers would be able to participate 
in any class actions relating to a given product line. The Bureau 
believes that, once this occurs for a given product line, the provider 
will have the incentive provided by class exposure to avoid potentially 
illegal practices in relation to that product, and that these actions 
will generally benefit all consumers, even those who cannot participate 
in a class action.
---------------------------------------------------------------------------

    \1068\ For example, in the credit card market, the number of new 
accounts opened per year since 2011 has ranged from approximately 80 
million to approximately 100 million, and the number of open credit 
card accounts has held steady since 2011 at approximately 600 
million. See Bureau of Consumer Fin. Prot., ``The Consumer Credit 
Card Market,'' at 89 fig. 2 (Dec. 2015), available at http://files.consumerfinance.gov/f/201512_cfpb_report-the-consumer-credit-card-market.pdf (number of new accounts opened per year) and at 33 
fig. 4 (number of open accounts over time). As a result, the Bureau 
estimates that, within five years, about 80 percent of credit card 
accounts would be covered by the rule, even if contractual 
modifications do not subject an agreement to the rule. In the 
checking account market, attrition data indicate that consumers 
close about half of all checking accounts within three years and 
two-thirds of all accounts within five years. See Harland Clarke, 
``State of the Industry 2012 Financial Services Benchmarking 
Analysis,'' (2012), available at http://harlandclarke.com/solutions/docs/industry-benchmarking-report. Thus, assuming that consumers 
continue to open new accounts at about the same rate, the Bureau 
estimates that, within five years, about two-thirds of checking 
accounts will be covered by the rule, even if contractual 
modifications do not subject an agreement to the rule. (If consumers 
open new accounts at a higher rate than the rate at which they close 
old accounts, an even higher share of accounts would be covered by 
the rule.).
---------------------------------------------------------------------------

    For these reasons, the Bureau believes that expanding its 
interpretation of ``entered into'' for purposes of Sec.  1040.4 to 
include modifications generally (even when there is no provision of a 
new product) would not yield significant consumer benefit. At the same 
time, such an approach would increase the rule's complexity and 
uncertainty by requiring providers, the Bureau, other regulators, and 
the courts to determine, for purposes of the rule, what types of 
modifications of existing products constitute entering into and which 
do not. For example, determining what modifications are sufficiently 
``material'' would be a complicated line-drawing process. For these 
reasons, the Bureau is not expanding its interpretation of ``entered 
into'' for the purposes of Sec.  1040.4 to include modifications of 
existing contracts after the compliance date that do not represent the 
provision of a new product or service.
    Similarly, the Bureau declines to expand its interpretation of 
``entered into'' for purposes of Sec.  1040.4 such that agreements 
entered into before the compliance date would be subject to the rule if 
the provider modifies the pre-dispute arbitration agreement (but not 
the overall product agreement after the compliance date). As described 
above, a commenter asserted that this approach would deter providers 
from amending their pre-dispute arbitration agreements after the 
compliance date to add class actions waivers and thus expand the reach 
of the proposal. The Bureau believes that some of the same 
considerations about complexity and uncertainty, described above, that 
warranted not expanding its interpretation of ``entered into'' to 
include modifications to product agreements also apply in the context 
of modifications to arbitration agreements themselves. Additionally, in 
response to the consumer law firm's comment that interpreting ``entered 
into'' to include modifications to arbitration agreements would deter 
providers from amending their pre-dispute arbitration agreements after 
the compliance date to add class action waivers, the Bureau does not 
believe that providers covered by the rule will have an incentive to 
add class

[[Page 33376]]

action waivers to their arbitration agreements, because part 1040 will 
render such provisions ineffective.
    The Bureau also declines to subject all agreements to the rule 
regardless of when they were entered into (as requested by the 
nonprofit commenter) and to subject all existing contracts to the rule 
after a period of one year (as requested by the consumer advocate 
commenter). Section 1028(d) requires that any regulation prescribed by 
the Bureau shall apply to agreements entered into after the compliance 
date, and both of these approaches would cause the Bureau's rule to 
apply to some agreements not entered into after the compliance date. 
The Bureau also declines to adopt the public-interest consumer lawyer's 
recommendation to delete comment 4-1.ii.A. The Bureau believes the 
comment promotes a uniform approach to the application of the rule, 
which will thus facilitate compliance and reduce burden and 
uncertainty.
    Moreover, the Bureau declines to adopt the interpretation requested 
by industry commenters that a provider does not enter into a pre-
dispute arbitration agreement where, after the compliance date, it 
acquires or purchases a covered product that predated the compliance 
date. The Bureau disagrees with the industry commenter's assertion that 
an agreement is not entered into in this scenario because the acquirer 
or purchaser already had rights under the agreement. Even where an 
agreement states that it is enforceable by a purchaser, a particular 
purchaser generally does not gain rights in a product agreement until 
it actually purchases--or enters into--the product agreement. That is, 
such a person does not become a purchaser until it engages in 
purchasing.\1069\ If the industry commenter was asserting that a 
particular third party could acquire some rights in a pre-dispute 
arbitration agreement before the compliance date, and then additional 
rights after the compliance date, it provided no concrete details as to 
when such a scenario would occur. If such a third party is engaged in 
providing the same product or service, such as debt collection, to the 
same consumer on the same consumer credit account before and after the 
compliance date, then the rule generally would not apply.
---------------------------------------------------------------------------

    \1069\ For instance, where there is a contract between a lender 
and a consumer, a debt buyer cannot enforce an arbitration agreement 
in that product agreement before it acquires or purchases the 
product agreement, even if the product agreement confers rights on 
third-party beneficiaries.
---------------------------------------------------------------------------

    With respect to the assertion by a different industry commenter 
that acquirers or purchasers should not be subject to the rule because 
the enforceability of a contract provision cannot depend on the 
identity of the party enforcing it, the Bureau does not believe that 
this is accurate. Different parties to a contract may be subject to 
different regulatory requirements, some of which may limit their 
ability to enforce certain provisions. Thus, if a party has in fact 
entered into a contract after the compliance date, then that party may 
be subject to this rule, even if a different person entered into the 
contract before the compliance date and is not subject to the rule.
    In response to the industry commenter that requested that the 
Bureau clarify how the rule applies in the context of bank 
acquisitions, the Bureau notes that, as comment 4-1.i.B explains, an 
acquiring bank enters into an acquired bank's pre-dispute arbitration 
agreements for purposes of Sec.  1040.4 where it becomes a party to the 
acquired bank's arbitration agreements (or product agreements subject 
to arbitration agreements) after the compliance date, even if the 
agreements were entered into by the acquired bank before the compliance 
date.\1070\ As comment 4-1.ii.B clarifies, the acquiring bank does not 
enter into the acquired bank's pre-dispute arbitration agreements for 
purposes of Sec.  1040.4 where it does not become a party to the 
acquired bank's pre-dispute arbitration agreements or product 
agreements, even if the agreements were entered into before the 
compliance date. In response to the trade association of consumer 
lawyers' comment that the final rule should state expressly that 
assignees enter into pre-dispute arbitration agreements (in addition to 
acquirers and purchasers), the final rule uses the terms acquiring and 
purchasing because those are the terms used in the Dodd-Frank Act's 
definition of financial product or service.\1071\ The Bureau believes 
that whether a particular assignment constitutes an acquisition or 
purchase will depend on the particular facts and circumstances of the 
relevant transaction.
---------------------------------------------------------------------------

    \1070\ See also comment 4(a)(2)-2 (explaining how Sec.  
1040.4(a)(2) applies in the context of bank acquisitions).
    \1071\ See 12 U.S.C. 5481(15)(A).
---------------------------------------------------------------------------

    The Bureau is finalizing comment 4-2 largely as proposed. The 
Bureau has revised comment 4-2 to refer to the compliance date (instead 
of the effective date) and has made other minor modifications to 
improve readability.
4(b) Submission of Arbitral Records
    As discussed above in Part VI, while proposed Sec.  1040.4(a) would 
have prevented providers from relying on pre-dispute arbitration 
agreements in class actions, it would not have prohibited covered 
entities from maintaining pre-dispute arbitration agreements in 
consumer contracts generally; nor would it have prevented providers 
from still invoking such agreements to compel arbitration in cases not 
filed as putative class actions. Thus, the Bureau separately considered 
in the proposal 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. The Bureau 
ultimately decided not to propose to prohibit specific practices in 
individual arbitration, but rather to propose an ongoing monitoring 
regime in light of historical precedent suggesting that there could be 
risks to consumers in certain circumstances from biased arbitration 
administrators or other practices.
    Accordingly, pursuant to its authority under sections 1028(b) and 
1022(c)(4) of the Dodd-Frank Act, the Bureau proposed Sec.  1040.4(b), 
which would have required providers to submit copies of certain 
arbitral records to the Bureau. Specifically, proposed Sec.  
1040.4(b)(1) would have required providers, for any pre-dispute 
arbitration agreement entered into after the compliance date, to submit 
copies to the Bureau of claims, judgments or awards, and certain other 
records concerning specific arbitration proceedings, as well as certain 
decisions by an arbitration administrator concerning the fairness of 
the underlying arbitration agreements. The Bureau explained in the 
proposal that it intended to develop, implement, and publicize an 
electronic submission process before the compliance date if proposed 
Sec.  1040.4(b) were adopted. Proposed Sec.  1040.4(b)(2) addressed the 
timing of records submissions, while proposed Sec.  1040.4(b)(3) would 
have set forth the information that providers shall redact before 
submitting records to the Bureau.\1072\
---------------------------------------------------------------------------

    \1072\ Pursuant to Dodd-Frank section 1022(c)(4)(C), the Bureau 
may not obtain information under its section 1022(c)(4) authority 
``for the purposes of gathering or analyzing the personally 
identifiable financial information of consumers.''
---------------------------------------------------------------------------

    Using the records collected and other sources, the Bureau stated 
that it intended to continue to evaluate the

[[Page 33377]]

impacts on consumers of arbitration and arbitration agreements and draw 
upon all of its statutorily authorized tools to address conduct that 
harms consumers to the extent necessary and appropriate. The Bureau 
also noted its willingness to consider conducting additional studies on 
consumer arbitration pursuant to Dodd-Frank section 1028(a) to evaluate 
whether further rulemaking would be in the public interest and for the 
protection of consumers,\1073\ improving its consumer education tools, 
or, where appropriate, undertaking enforcement or supervisory actions.
---------------------------------------------------------------------------

    \1073\ 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.
---------------------------------------------------------------------------

    Proposed comment 4(b)-1 would have clarified that providers are not 
required to submit 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, but that the 
obligation to comply with Sec.  1040.4(a) nevertheless remains on the 
provider. The provider must ensure that the person submits the records 
in accordance with Sec.  1040.4(b).
    Proposed comment 4(b)(3)-1 would have clarified that 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).
    As set forth in more detail below, the Bureau is finalizing Sec.  
1040.4(b)(1) through (b)(3) largely as proposed with the addition of 
two additional categories of records. In addition the Bureau is 
finalizing new provisions Sec.  1040.4(b)(4) through (b)(6), which 
require the Bureau to redact and then publish to the internet the 
records received by the Bureau pursuant to Sec.  1040.4(b)(1) through 
(b)(3).
    The Bureau finalizes comment 4(b)-1, having received no comments on 
this specific commentary. The Bureau also finalizes proposed comment 
4(b)(3)-1, renumbered as 4(b)-2, having received no comments on this 
specific commentary.
4(b)(1) Records To Be Submitted
    As stated above, proposed Sec.  1040.4(b) would have required 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.\1074\ Proposed Sec.  1040.4(b)(1) would 
have listed the arbitral records that providers would be required to 
submit to the Bureau. Compliance with this provision would have been 
required for pre-dispute arbitration agreements entered into after the 
compliance date. The Bureau received a number of comments on the 
structure and content of the various subparts of proposed Sec.  
1040.4(b)(1) (from proposed Sec.  1040.4(b)(1)(i) through new Sec.  
1040.4(b)(1)(iii)), which are addressed further below. The Bureau also 
received several comments on proposed Sec.  1040.4(b)(1) more 
generally.
---------------------------------------------------------------------------

    \1074\ The Bureau stated in the proposal that it anticipated 
that it would separately provide technical details pertaining to the 
submission process.
---------------------------------------------------------------------------

    An industry commenter pointed to a reference in the proposal to 
section 1021(b) of the Dodd-Frank Act, which defines the Bureau's 
objectives to include ``ensuring . . . [that] Federal consumer 
financial law is enforced consistently.'' The commenter asserted that 
this section may grant the Bureau the authority to determine if Federal 
consumer financial law is being applied consistently, but does not 
grant the Bureau authority to determine whether arbitrators are 
applying Federal consumer financial law consistently thus this part of 
the proposal exceeded the Bureau's authority. Some commenters argued 
that the Bureau lacked authority to collect arbitration materials. One 
industry commenter argued that the monitoring proposal created a new 
and direct ``channel'' of supervision by the Bureau for small entities, 
which are generally not subject to the Bureau's examination authority. 
Another industry commenter expressed doubts over whether the Bureau 
could collect documents from financial institutions for which it was 
not the primary regulator. Another industry commenter argued that 
arbitration is not a consumer financial product or service and, 
therefore, cannot be regulated by the Bureau under its authority under 
section 1022(c), which permits market monitoring as to the ``offering 
or provision of'' consumer financial products.
    Section 1040.4(b)(1) is largely finalized as proposed, with several 
additions set out below in Sec.  1040.4(b)(1)(i) through (b)(1)(iii).
    As to the comment that Dodd-Frank section 1021(b) does not give the 
Bureau authority to determine whether arbitrators are enforcing 
consumer financial laws consistently, the Bureau disagrees with the 
comment's premise. The Bureau cites provisions other than section 
1021(b) as legal authority for the monitoring requirement.\1075\ Here, 
the Bureau cites section 1021(b) because it expresses one of several 
public interest goals that the Bureau is charged with furthering. The 
Bureau finds that monitoring enables more consistent enforcement of the 
consumer financial laws by permitting the Bureau and public to review 
provider behavior in arbitration proceedings and business practices 
that may give rise to such proceedings.
---------------------------------------------------------------------------

    \1075\ As set out above in Part V, the Bureau relies on sections 
1028(b) and 1022 of the Dodd-Frank Act as legal authority to 
promulgate a rule requiring the submission and publication of 
documents.
---------------------------------------------------------------------------

    As to various commenters that challenged the Bureau's authority to 
adopt the rule, the Bureau relies on sections 1028 and 1022 of the 
Dodd-Frank Act as set out in greater detail in the Parts V and VI.D, 
above. Those provisions authorize the Bureau to collect documents from 
providers of consumer financial products, even with regard to entities 
for which it does not exercise supervisory authority under sections 
1024 through 1026. The Bureau finds that its market monitoring 
authority under section 1022 encompasses the dispute resolution 
mechanisms that providers of consumer financial products adopt to 
resolve conflicts with their customers. Contrary to the commenters' 
assertions, monitoring does not create a new de facto ``channel'' for 
examining small entities not subject to the Bureau's larger participant 
rulemakings. Monitoring simply permits the Bureau to understand 
fairness and quantity of the specific arbitration proceedings that 
arise. In any case, many providers that are not subject to the Bureau's 
supervision authority otherwise are subject to the Bureau's market 
monitoring authority and the Bureau's enforcement authority for unfair, 
deceptive, and abusive acts and practices. The Bureau believes 
consumers will benefit if records pertaining to individual arbitration 
proceedings are submitted to the Bureau. Further, as to the industry 
comment that arbitration is not a consumer financial product for 
purposes of collecting data under 1022(c) of the Dodd-Frank Act, the 
Bureau interprets its market monitoring under 1022(c)(1)), which 
authorizes ``monitor[ing] for risks to consumers in the offering or 
provision of consumer financial products or services''

[[Page 33378]]

(emphasis added) by the Bureau, broadly to include documents that 
assist the Bureau in understanding markets and mechanisms (such as 
dispute resolution tools) that providers use to administer consumer 
financial products. In any case, the Bureau is not using its authority 
to monitor arbitrators or arbitration administrators, but rather the 
providers that use arbitration.
    With regard to the commenter that expressed doubts over whether the 
Bureau could collect documents from financial institutions for which it 
was not the primary regulator, the Bureau disagrees, given the 
affirmative grant of authority to the Bureau under sections 1022 and 
1028 of the Dodd-Frank Act. The Bureau has routinely interpreted its 
section 1022 market monitoring authority to reach all entities covered 
by the Dodd-Frank Act.
4(b)(1)(i)
    Proposed Sec.  1040.4(b)(1)(i) would have required, 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.
    Specific comments relating to each of the individual proposed 
categories of records are discussed separately below. Separately, the 
Bureau received several general comments that suggested expansions in 
the categories of records subject to the submission requirement of 
proposed 1040.4(b)(1)(i) and urged the Bureau to exclude some providers 
from complying with the proposed requirement.\1076\
---------------------------------------------------------------------------

    \1076\ The Bureau addressed comments regarding its preliminary 
finding that the monitoring proposal was in the public interest and 
for the protection of consumers above in Part VI.B.
---------------------------------------------------------------------------

    One consumer advocate commenter suggested that the Bureau should 
require providers to submit a number of other documents or data related 
to the timing of arbitration proceedings (including the date on which 
the statement of claim was filed, the date on which the provider paid 
administration or arbitration fees, the date on which the arbitration 
hearing was held, and the date on which the award was issued) to permit 
the Bureau to understand how often providers delayed arbitration 
proceedings. The consumer advocate commenter also suggested that the 
Bureau should require providers to submit information on the 
relationship of the administrator with the parties, including any ex 
parte communications between a provider and an arbitrator or arbitral 
administrator to see if the provider made any attempts to influence the 
outcome of arbitration proceedings,\1077\ and records of any financial 
relationship between a provider and the arbitrator or arbitral 
administrator, citing NAF's conflict issues as an example.\1078\ This 
consumer advocate commenter suggested that these materials would help 
the Bureau and other groups monitor the extent of specific arbitration 
harms, including the use of delay as a tactic in arbitration 
proceedings to prevent consumers from obtaining relief, and the use of 
influence or pre-existing financial connections with arbitrators and 
administrators by providers to change the outcome of arbitration 
awards.
---------------------------------------------------------------------------

    \1077\ Specifically, the consumer advocate commenter referred to 
an example outside of the context of consumer finance in which a 
company put pressure on the arbitration administrator to overrule or 
reverse an arbitrator who had determined that the relevant pre-
dispute arbitration agreement permitted classwide arbitration. 
According to the commenter, such communications between the company 
and the arbitration administrator were not disclosed to the 
consumer.
    \1078\ Specifically, the consumer advocate referred to the 
example, discussed above, of the relationship between the NAF and a 
debt collection company, both of which were owned by the same parent 
company.
---------------------------------------------------------------------------

    Another consumer lawyer commenter suggested that the Bureau should 
require providers to submit information to the Bureau on the protected 
group status of consumers--including race, ethnicity and gender--
subject to pre-dispute arbitration agreements, whether or not the 
consumers were parties to an arbitration proceeding, so that the Bureau 
and others can analyze the disparate impact of such agreements on 
protected groups. The consumer lawyer commenter noted that, in its 
experience, pre-dispute arbitration agreements are used to deter formal 
claims by consumers before they are raised generally, that this 
deterrence has a disparate impact on protected groups, and that the 
Bureau should thus collect data on protected group status to analyze 
this. The commenter suggested that such data on the protected group 
status of consumers should be collected in such a way that it is not 
disclosed inappropriately to the arbitrator, such that the arbitrator 
could make decisions without access to the protected group status of 
consumer participants to arbitrations. The commenter admitted that it 
was unsure, practically, how the Bureau could collect this information 
and avoid disclosure to the arbitrator.
    A Tribal commenter requested that the Bureau exclude Tribal 
entities from complying with the formal aspects of the monitoring 
proposal and suggested instead that the Bureau could receive similar 
information by collaborating with Tribal regulatory bodies to 
potentially engage in information sharing.
    Based on the Bureau's responses to more general comments on 
arbitral records, and for the more specific reasons set out below in 
the section-by-section analyses of Sec.  1040.4(b)(1)(i)(A) through 
(i)(E), the Bureau is finalizing Sec.  1040.4(b)(1)(i). Section 
1040.4(b)(1)(i) sets forth what arbitration related documents providers 
must submit, largely as proposed, with the addition of one new category 
of arbitration-related record in new (b)(1)(i)(B), which requires the 
submission of answers to initial claims and counterclaims.
    The Bureau disagrees that the final rule should require providers 
to submit additional types of documents suggested by commenters, other 
than one category of document set out in Sec.  1040.4(b)(1)(i)(B) 
below. The Bureau believes that the documents required by Sec.  
1040.4(b)(1)(i) capture significant data on the timing of arbitration 
proceedings and any delays. Specifically, the documents the Bureau will 
receive--claims, answers to claims, and awards--will themselves show 
dates and permit the Bureau to determine the time between filing and 
awards in many cases. The submission of additional documents on timing 
would likely increase burden on providers without a clear benefit to 
consumers, the policymaking of the Bureau, or others.
    The Bureau also disagrees with the consumer advocate commenter that 
the final rule should require the submission of records, information or 
ex parte communications pertaining to potential conflicts of interests 
(including financial relationships between providers and an arbitrator 
or arbitral administrator), or attempts to influence arbitrators or 
administrators. The Bureau believes such requirements would be 
redundant in that attorneys and arbitrators in arbitral proceedings are 
already subject to ethical or professional rules requiring the 
disclosure of any relationships or communications that may create the 
appearance of a conflict of interest or

[[Page 33379]]

unfairness.\1079\ The Bureau believes that the commenter's suggestion 
could involve complicated questions as to what types of records fall 
within the scope of the requirement and heighten burdens on all 
providers subject to the monitoring rule. The Bureau believes that 
Sec.  1040.4(b)(i) will substantially increase transparency into 
arbitration proceedings. The Bureau intends to continue to monitor 
arbitration proceedings going forward for conflicts of interest, and 
other issues, and may consider further measures or requirements as 
needed.
---------------------------------------------------------------------------

    \1079\ See, e.g., American Bar Ass'n, ``Model Rules of 
Professional Conduct,'' at Rule 3.5 (A lawyer shall not: (a) Seek to 
influence a judge . . . or other official by means prohibited by 
law; (b) communicate ex parte with such a person during the 
proceeding unless authorized to do so by law or court order . . . 
.''); AAA, ``Code of Ethics for Arbitrators in Commercial 
Disputes,'' at Canon II (``An arbitrator should disclose any 
interest or relationship likely to affect impartiality or which 
might create an appearance of partiality.''); JAMS, ``Arbitrator 
Ethics Guidelines,'' at V.A. (``An Arbitrator should promptly 
disclose, or cause to be disclosed all matters required by 
applicable law and any actual or potential conflict of interest or 
relationship or other information, of which the Arbitrator is aware, 
that reasonably could lead a Party to question the Arbitrator's 
impartiality.'').
---------------------------------------------------------------------------

    The Bureau agrees with a consumer advocate commenter that the 
receipt of information on the protected group status of consumers 
subject to pre-dispute arbitration agreements, whether or not the 
consumers were parties to an arbitration proceedings, could be 
potentially useful in analyzing the disparate impact of such agreements 
on protected groups. However, the Bureau views the collection of such 
data about consumers that were deterred from making claims at all as 
impracticable in the context of this rulemaking. The consumer lawyer 
admitted in its comment the difficulties of devising a practicable 
means to obtain such information without drawing the attention of 
arbitrators to the protected group status of the consumer.
    The Bureau disagrees with the comment that Tribal entities should 
be excluded from the monitoring proposal because the Bureau could 
instead collaborate with Tribal regulatory bodies to engage in 
information sharing. The Bureau believes that practically speaking, 
this part of the proposal should have no or minimal impact on most 
Tribal entities, given that the final rule's exemption. The Bureau also 
believes that those entities that do use arbitration agreements should 
find it simpler and less time-consuming to comply with the relatively 
simple provisions of the rule, rather than waiting for collaborations 
between different Tribal regulatory bodies and the Bureau to develop ad 
hoc information-sharing schemes with each Tribal regulator and lender 
subject to that regulator.
4(b)(1)(i)(A)
    Proposed Sec.  1040.4(b)(1)(i)(A) would have required providers to 
submit any initial claims filed in arbitration pursuant to a pre-
dispute arbitration agreement and any counterclaims. By ``initial 
claim,'' the Bureau meant the filing that initiates the arbitration, 
such as the initial claim form or demand for arbitration.
    One industry commenter suggested that proposed Sec.  
1040.4(b)(1)(i) should be modified to require that providers submit 
only the ``substance of'' initial statements of claims and any 
counterclaim in arbitration. The industry commenter reasoned that 
consumers often submit additional documents as attachments to 
statements of claim, such as bank statements, that would require 
extensive and burdensome redactions.
    Section 1040.4(b)(1)(i)(A) is finalized as proposed. The Bureau 
concludes that a statement of claim is necessary to understand the 
nature of a dispute. As discussed in detail above, the Bureau believes 
that collecting claims will 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 will 
also help the Bureau identify business practices that harm consumers.
    The Bureau disagrees that providers should be permitted to 
summarize the ``substance of'' initial statements of claims simply 
because consumers may attach additional documents to statements of 
claim that may require redaction before submission. The Bureau believes 
that any redaction burden will be limited in cost, even for lengthier 
additional documents, based on its experience of having reviewed 
statements of claim in the course of the Study,\1080\ and that writing 
a summary could be more burdensome than redacting text. Further, the 
Bureau believes that a provider's summary of a consumer's statement of 
claim may not fully express the consumer's understanding of a dispute. 
In any case, new Sec.  1040.4(b)(1)(i)(B), described below, requires 
providers to submit answers to statements of claim, giving providers 
the opportunity to address any potentially erroneous or misleading 
statements made by consumers.
---------------------------------------------------------------------------

    \1080\ See Study, supra note 3, section 5 at 19-32 (analyzing 
1,847 individual consumer arbitration claims before the AAA).
---------------------------------------------------------------------------

4(b)(1)(i)(B)
    In the final rule, the Bureau is adopting new Sec.  
1040.4(b)(1)(i)(B) (proposed Sec.  1040.4(b)(1)(i)(B) is renumbered as 
Sec.  1040.4(b)(1)(i)(C)), which requires that providers should also 
submit answers to arbitration statements of claim.
    The Bureau is adopting Sec.  1040.4(b)(1)(i)(B) in response to 
several commenters' concern that the original proposal, which only 
required the submission of initial claims and counterclaims, could 
result in a one-sided presentation of the facts in an arbitration 
proceeding, especially where no award was issued. Specifically, the 
Bureau adopts the suggestion by one Tribal commenter that providers be 
required to submit answers to initial claim filings.
    As the Study demonstrated, most arbitration proceedings do not 
result in a final award or judgment issued by a neutral 
arbitrator.\1081\ Under the Bureau's original proposal, in the absence 
of an award, the only information on the substantive dispute at issue 
in most arbitration proceedings would have been the initial claims and 
counterclaims. The Bureau believes that requiring providers to submit 
answers to initial claims and counterclaims will result in a more 
balanced understanding of arbitration proceedings and that the 
additional burden will be minimal. The Bureau believes that Sec.  
1040.4(b)(1)(i)(B) should alleviate the concerns of industry commenters 
noted above. Section 1040.4(b)(1)(i)(B) also requires the submission of 
consumers' answers to statements of claim filed against them. This will 
similarly help offer a more balanced view of provider-filed statements 
of claims (or counterclaims).
---------------------------------------------------------------------------

    \1081\ Id. section 5 at 11 (``As with other systems of dispute 
resolution, only a minority of consumer financial arbitrations 
reached the point where there was a decision on the merits of the 
parties' claims. Specifically, arbitrators resolved less than a 
third (32.2 percent) of the consumer financial arbitration disputes 
on the merits.'').
---------------------------------------------------------------------------

4(b)(1)(i)(C)
    Proposed Sec.  1040.4(b)(1)(i)(B) would have required 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 noted in the 
proposal that, due to concerns relating

[[Page 33380]]

to burden on providers and the Bureau itself, the Bureau did not 
propose to collect all pre-dispute arbitration agreements that are 
provided to consumers. Instead, it proposed only to require submission 
in the event an arbitration filing occurs.\1082\ By collecting the pre-
dispute arbitration agreement in such situations, the Bureau would have 
been 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 awards pursuant to 
proposed Sec.  1040.4(b)(1)(i)(C)--would have permitted the Bureau to 
gather information on whether clauses specifying that the parties waive 
certain substantive rights when pursuing the claim in arbitration 
affect outcomes in arbitration.
---------------------------------------------------------------------------

    \1082\ As noted below, credit card and prepaid account issuers 
are already required to submit their consumer agreements to the 
Bureau.
---------------------------------------------------------------------------

    A nonprofit commenter and a consumer advocate commenter suggested 
that all entities covered by the rule should submit all pre-dispute 
arbitration agreements covered by the rule to the Bureau. The same 
nonprofit commenter suggested that all amendments to pre-dispute 
arbitration agreements should also be subject to the submission 
requirement, and that any information on pre-dispute arbitration 
agreements that require hearings in fora inconvenient to consumers 
should be submitted to the Bureau. Another consumer advocate suggested 
that entities supervised by the Bureau that are also providers under 
the rule be required to submit all of their covered pre-dispute 
arbitration agreements to the Bureau. These commenters argued that such 
additional steps were warranted because they believed that individual 
arbitration proceedings themselves were problematic and unfair to 
consumers, that smaller providers were not likely to drop their pre-
dispute arbitration agreements, and that pre-dispute arbitration 
agreements themselves could be reviewed for unfairness to consumers.
    Proposed Sec.  1040.4(b)(1)(i)(B), renumbered in this final rule as 
Sec.  1040.4(b)(1)(i)(C), is finalized as proposed. By collecting the 
pre-dispute arbitration agreement in filed arbitrations, the Bureau 
will be able to monitor the impact that particular clauses in an 
agreement have on the conduct of arbitrations. The Bureau disagrees 
with consumer advocate commenters that this provision should be 
expanded to require all providers to submit pre-dispute arbitration 
agreements to the Bureau. The Bureau noted in its proposal that, due to 
concerns relating to burden on providers and the Bureau itself, the 
Bureau did not propose to collect all pre-dispute arbitration 
agreements that are provided to consumers. None of the comments 
suggested ways to mitigate such burdens. Further, the Bureau believes 
that many providers that use pre-dispute arbitration agreements, but 
will not be required by Sec.  1040.4(b)(1)(i)(C) to submit such 
agreements to the Bureau because they are not a party to an arbitration 
proceeding, may be required by other Bureau regulations to submit pre-
dispute arbitration agreements in any case. Pursuant to Regulation Z, 
credit card issuers are already required to submit their consumer 
agreements to the Bureau. See 12 CFR 1026.58. The Bureau also will 
require the collection of prepaid account agreements. See 12 CFR 
1005.19(b) (effective October 1, 2018). Further, the Bureau may monitor 
the arbitration activities and review the arbitration records of the 
providers subject to the Bureau's supervision authority in 
examinations.
4(b)(1)(i)(D)
    Proposed Sec.  1040.4(b)(1)(i)(C) would have required 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 was intended to reach only awards 
issued by an arbitrator that resolved an arbitration and not settlement 
agreements that 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.
    An industry commenter suggested that the Bureau should not collect 
awards or judgments for a number of reasons, including that the 
proposal would discourage arbitrators from making explicit findings, 
knowing that the Bureau might subject the provider to further scrutiny, 
and that the proposal would put the onus on arbitrators to assess the 
fairness of arbitration agreements when it is the role of courts to 
analyze the fairness of such agreements.
    Proposed Sec.  1040.4(b)(1)(i)(C), renumbered as Sec.  
1040.4(b)(1)(i)(D), is finalized as proposed. As discussed in detail in 
Part VI.D, the Bureau disagrees with the industry commenter that argued 
that this provision of the rule may disincentivize arbitrators from 
making certain findings. Indeed, the Bureau believes publication will 
make arbitrators more deliberative in their decision-making, and that 
this is in the public interest and for the protection of consumers. The 
Bureau agrees with the commenter that suggested that this provision may 
also subject some providers to further Bureau scrutiny, especially if 
they are repeatedly involved in arbitrations. The Bureau believes that 
such an outcome is a potential benefit. The Bureau believes that it is 
in the public interest and for the protection of consumers to subject 
certain providers--especially those that have multiple final awards 
against them from consumers on the same issue--to further scrutiny from 
the Bureau, other regulators, and the public regarding the providers' 
business and compliance practices. Overall, the Bureau believes that 
the submission of awards will aid the Bureau in its ongoing review of 
arbitration and help the Bureau assess whether arbitrations are being 
conducted fairly and without bias.
4(b)(1)(i)(E)
    Proposed Sec.  1040.4(b)(1)(i)(D) would have applied 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 were to occur, proposed Sec.  
1040.4(b)(1)(i)(D) would have required the provider to submit any 
communication the provider receives from the arbitration administrator 
related to such a refusal or dismissal. As the proposal explained 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.\1083\ Pre-dispute arbitration agreements often 
mandate that the provider, rather than the consumer, pay some of the 
consumer's arbitration fees.\1084\
---------------------------------------------------------------------------

    \1083\ See AAA, Consumer Arbitration Rules, supra note 137, at 
32; JAMS Streamlined Arbitration Rules, supra note 139, at 9.
    \1084\ Study, supra note 3, 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 
in

[[Page 33381]]

either forum. The Study identified at least 50 instances of such 
nonpayment of fees by companies in cases filed by consumers.\1085\ The 
Bureau had proposed Sec.  1040.4(b)(1)(i)(D) to permit it to monitor 
nonpayment 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 had further expected that requiring submission of 
communications related to nonpayment of fees would discourage providers 
from engaging in such activity.
---------------------------------------------------------------------------

    \1085\ Id. 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 have required 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 believed this requirement would have 
prevented providers who engage in strategic nonpayment of arbitration 
fees to claim, in bad faith, ongoing settlement talks to avoid the 
disclosure to the Bureau of communications regarding their nonpayment. 
The Bureau had anticipated 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 have required submission of the 
underlying settlement agreement or a notification that a settlement has 
occurred.
    One consumer advocate commenter suggested that the Bureau should 
require providers to submit a number of other documents or data related 
to costs and fees in arbitration proceedings, including documents on 
the arbitration and administrative costs paid by providers and 
consumers in arbitration to ensure that the Bureau would be aware of 
general cost levels, documents relating to requests or grants of a 
reduction in arbitration costs for the consumer to see how often 
providers helped make arbitration proceedings affordable for consumers.
    Proposed Sec.  1040.4(b)(1)(i)(D), renumbered as Sec.  
1040.4(b)(1)(i)(E), is finalized as proposed. The Bureau believes this 
provision will provide transparency as to fee practices generally, and 
that companies submitting communications pursuant to final Sec.  
1040.4(b)(1)(i)(E) can indicate in their submission that nonpayment 
resulted from settlement. The Bureau believes that the general 
attention to this issue will discourage providers from claiming in bad 
faith that the nonpayment of fees is due to ongoing settlement talks 
when in fact they are engaged in a tactical maneuver to prevent a 
consumer from pursuing the consumer's claim.
    The Bureau disagrees with consumer advocate commenters that it 
should require that providers submit additional records on the cost of 
the arbitration. The Bureau does not believe that the additional data 
commenters have suggested collecting would be useful enough to justify 
the additional burden it would pose to collect and analyze such 
documents. The final rule already addresses the most serious cost-
related issue identified in the Study and Sec.  1040.4(b)(1)(i)(E) 
requires the submission of records pertaining to a party's refusal to 
pay required arbitrator or administrator costs or fees. There may be 
some incremental benefit to receiving further documents detailing 
costs, such as documents on in forma pauperis applications or hardships 
requests consumers make to arbitration administrators for exceptions 
from paying filing fees. However, the Bureau believes that Sec.  
1040.4(b)(1)(i)(E) will alert the Bureau to certain cost-related issues 
identified in the Study that can stop consumers from pursuing claims 
completely while keeping the burden on providers of submitting records 
relatively low.\1086\ The Bureau further believes that it may be 
possible to estimate such cost data from arbitration administrator 
rules and documents it will collect, including pre-dispute arbitration 
agreements and arbitrators' awards, which will inform the Bureau on 
general cost structures, indicate whether fee-shifting is allowed, and 
document fee awards. The Bureau understands that the cost structure of 
many arbitration provisions is potentially burdensome on many 
consumers, and that other cost provisions such as fee-shifting can 
exacerbate this potential burden. The collection of many pre-dispute 
arbitration agreements giving rise to specific arbitration proceedings 
pursuant to Sec.  1040.4(b)(1)(i)(C) will permit the Bureau to review 
fee structures and fee-shifting provisions faced by consumers while 
limiting additional burden on providers.
---------------------------------------------------------------------------

    \1086\ See id. section 5 at 76.
---------------------------------------------------------------------------

4(b)(1)(ii)
The Bureau's Proposal
    Proposed Sec.  1040.4(b)(1)(ii) would have required providers to 
submit to the Bureau any communication from an arbitrator or 
arbitration administrator related to a determination that a provider's 
pre-dispute arbitration agreement does not comply with the 
administrator's fairness principles, rules, or similar requirements. 
The Bureau was concerned about providers' use of arbitration agreements 
that may violate arbitration administrators' fairness principles or 
rules. Several of the leading arbitration administrators maintain such 
principles or rules, which the administrators use to assess the 
fairness of the company's pre-dispute arbitration agreement.\1087\ 
These administrators may refuse to hear an arbitration if the company's 
arbitration agreement does not comply with the relevant fairness 
principles or rules.\1088\ At least one administrator will also review 
a company's agreement preemptively--before an arbitration claim has 
been filed--to determine if the agreement complies with the relevant 
fairness principles or rules.\1089\
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    \1087\ See AAA Consumer Due Process Protocol, supra note 142; 
JAMS Policy on Consumer Arbitrations, supra note 140.
    \1088\ See AAA Consumer Arbitration Rules, supra note 137, at 
10; JAMS Streamlined Arbitration Rules, supra note 139, at 6.
    \1089\ See AAA Consumer Arbitration Rules, supra note 137, at 
16.
---------------------------------------------------------------------------

    The Bureau believed 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 believed 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 or rules.
    Proposed comment 4(b)(1)(ii)-1 would have clarified 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 have 
required the submission of communications both when the

[[Page 33382]]

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 have stated 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 proposed this comment because it had understood 
that providers may submit pre-dispute arbitration agreements to 
administrators before incorporating the agreements into actual 
contracts.\1090\ The proposed comment would have stated 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 by a consumer 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.
---------------------------------------------------------------------------

    \1090\ 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 137, at 16.
---------------------------------------------------------------------------

    Proposed comment 4(b)(1)(ii)-2 would have clarified that what 
constitutes an administrator's fairness principles or rules pursuant to 
proposed Sec.  1040.4(b)(ii)(B) should be interpreted broadly. Further, 
that comment would have provided 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.\1091\
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    \1091\ AAA Consumer Due Process Protocol, supra note 138; JAMS 
Policy on Consumer Arbitrations, supra note 140. 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.
---------------------------------------------------------------------------

Comments Received
    The Bureau did not receive specific comments addressing the 
requirement in proposed Sec.  1040.4(b)(1)(ii) that providers submit 
communications related to non-compliance with an arbitration 
administrator's fairness protocols. The Bureau received comments that 
implicated proposed Sec.  1040.4(b)(1)(ii) from a consumer advocate 
that argued that the Bureau should promulgate specific due process or 
fairness standards for the content of pre-dispute arbitration 
agreements or the actual actions of providers in the course of 
arbitration proceedings rather than relying on the administrators to do 
so. The consumer advocate commenter asserted that individual 
arbitration itself is unfair and systematically favors providers and 
urged that if the Bureau is not going to prohibit arbitration 
altogether it should prescribe minimum standards for arbitration.
The Final Rule
    The Bureau finalizes Sec.  1040.4(b)(1)(ii) as proposed. For the 
reasons set out above in Part VI.B, the Bureau disagrees that it should 
adopt due process or fairness standards or should otherwise regulate 
provider conduct in arbitration proceedings. In the absence of 
additional data presented by commenters showing systematic unfairness 
in individual arbitrations, the Bureau believes that requiring 
providers to submit correspondence from administrators on the non-
compliance of pre-dispute arbitration agreements with administrator due 
process or fairness rules will aid the Bureau in identifying potential 
widespread unfairness to consumers while imposing minimal burden. In 
addition, the Bureau expects to use its supervisory function and may 
review other data--including credit card agreements and prepaid account 
agreements that providers are or will be required to submit to the 
Bureau \1092\--to further aid its efforts to review providers' pre-
dispute arbitration agreements for potential fairness issues.
---------------------------------------------------------------------------

    \1092\ See 12 CFR 1026.58; 12 CFR 1005.19(b).
---------------------------------------------------------------------------

    The Bureau is also finalizing comments 4(b)(1)(ii)-1 and -2 as 
proposed, having received no comments on this specific commentary.
4(b)(1)(iii)
    Prior to the publication of the monitoring proposal, consumer 
advocates and some other stakeholders had 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 had 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.
    After the publication of proposed Sec.  1040.4(b), other consumer 
lawyer and consumer advocate commenters suggested that the Bureau 
require providers to submit records anytime they rely on a pre-dispute 
arbitration agreement, specifically in the context of court filings in 
which, for instance, a party invokes a pre-dispute arbitration 
agreement to compel arbitration. The commenters asserted that requiring 
providers to submit litigation filings that rely on pre-dispute 
arbitration agreements would be an important means of monitoring the 
extent to which providers were using such filings to block individual 
litigation from proceeding (insofar as they could no longer be used to 
block class actions). More specifically, commenters suggested that the 
addition of such data would make it clear whether providers filed such 
motions to move consumers to arbitration as a preferred forum for 
formal dispute settlement instead of litigation, or whether providers 
were filing motions to compel arbitration to discourage consumers from 
proceeding at all. According to commenters, the absence of arbitration 
proceedings corresponding to motions made in litigation to compel 
arbitration would suggest that providers may have used arbitration 
agreements as a means to suppress claims outright, thus discouraging 
consumers from filing any type of formal claim.
    In response to these comments and other concerns, the Bureau adopts 
new Sec.  1040.4(b)(1)(iii), which requires providers to submit certain 
records that providers file in court. Specifically, new Sec.  
1040.4(b)(1)(iii)(A) requires that a provider submit to the Bureau any 
motion or filing sent by that provider to a court that relies on a pre-
dispute arbitration agreement. Pursuant to this provision, providers 
are required to submit motions attempting to dismiss, defer, or stay 
any aspect of a case in court where such motions rely in whole or in 
part on an arbitration agreement. The Bureau believes that collecting 
materials related to the invocation of an arbitration agreement will 
aid it in determining the frequency with which providers compel 
arbitration in response to individual litigation claims, the content of 
such motions to compel, and whether such claims actually end up being 
heard in arbitration rather than simply disappearing. The Bureau also 
agrees with the concern expressed by consumer advocates and some other

[[Page 33383]]

stakeholders that a requirement like proposed Sec.  1040.4(b) would not 
have permitted the Bureau to monitor or quantify the claims that 
consumers may have been deterred from filing because of the existence 
of a pre-dispute arbitration agreement. The Bureau believes that the 
collection of motions to compel arbitration, in conjunction with the 
other arbitral records it will receive, will help track whether such 
claims are ultimately heard in arbitration rather than being dropped 
entirely, which could in turn shed more light on the extent to which 
consumers are deterred from pursuing individual claims more generally 
because of arbitration agreements.
    The Bureau also finalizes new Sec.  1040.4(b)(1)(iii)(B), which 
requires that the provider submit to the Bureau the pre-dispute 
arbitration agreement relied on in the provider's motion to dismiss, 
defer or stay a case, which the provider is required to submit pursuant 
to Sec.  1040.4(b)(1)(iii)(A). The Bureau believes that Sec.  
1040.4(b)(1)(iii)(B) is needed to capture all pre-dispute arbitration 
agreements relied on in documents responsive to new Sec.  
1040.4(b)(1)(iii)(A). While such pre-dispute arbitration agreements are 
often attached to motions to dismiss or stay that are filed to compel 
arbitration, the Bureau has noted, in reviewing such records during the 
course of the Study, that occasionally some documents are simply cross-
referenced to other documents filed in the litigation. The Bureau 
believes that it is important to gather data on the frequency of 
filings relying on pre-dispute arbitration agreements, and whether the 
content of such arbitration agreements discourages or induces a 
consumer (or her attorney) to file the same claim against the provider 
in arbitration rather than litigation.
    The Bureau also adopts new commentary to clarify the application of 
Sec.  1040.4(b)(1)(iii). Comment 4(b)(1)(iii)-1 clarifies that Sec.  
1040.4(b)(1)(iii)(A) requires the submission of court filings only if 
they rely on pre-dispute arbitration agreements entered into after the 
compliance date set forth in Sec.  1040.5(a). Providers are only 
required to submit the initial motion relying upon a pre-dispute 
arbitration agreement; they need not submit later response documents, 
such as a consumer's opposition to the motion, or a provider's 
reply.\1093\
---------------------------------------------------------------------------

    \1093\ To limit the potential burden on providers, the Bureau 
will only require providers to submit the initial motion relying on 
an arbitration agreement. The Bureau expects to be able to collect 
other related documents, such as the order ruling on the motion or 
opposition or reply briefs by taking the docket number set out in 
the initial motion and searching for other documents in public 
sources or databases available to the Bureau. By contrast, the 
Bureau cannot obtain arbitration records on its own.
---------------------------------------------------------------------------

    New comment 4(b)(1)(iii)-2 sets out examples of certain types of 
court documents that do not trigger the obligation under Sec.  
1040.4(b)(1)(iii)(A) to submit records to the Bureau because they are 
not relying upon an arbitration agreement in support of an attempt to 
seek dismissal, deferral, or stay of any aspect of a case.\1094\ New 
comment 4(b)(1)(iii)-2.i clarifies that Sec.  1040.4(b)(1)(iii)(A) does 
not require providers to submit to the Bureau objections to discovery 
requests or motions seeking a protective order in response to a 
discovery request if either relies on an arbitration agreement, since 
such motions would not shed light on whether individual litigation 
claims are refiled in arbitration or are dropped completely. New 
comment 4(b)(1)(iii)-2.ii clarifies that under Sec.  
1040.4(b)(1)(iii)(A), providers are not required to submit answers to a 
complaint or the answers to a counterclaim if those materials only 
refer to an arbitration agreement. New comment 4(b)(1)(iii)-2.iii 
clarifies that under Sec.  1040.4(b)(1)(iii)(A), providers are not 
required to submit motions or filings that have as attachments a 
consumer's contract that contains a pre-dispute arbitration agreement 
if the provider does not rely on or cite to the arbitration agreement 
in the motion.
---------------------------------------------------------------------------

    \1094\ The comment is intended in part to emphasize that the 
focus of inquiry under Sec.  1040.4(b)(1)(iii) is whether a provider 
is relying upon an arbitration agreement in support of an attempt to 
seek dismissal, deferral, or stay of any aspect of a case, in order 
to assist the Bureau in tracking whether such individual cases are 
eventually refiled in arbitration. In contrast, Sec.  1040.4(a) 
focuses on whether providers rely on arbitration in any aspect of 
class litigation, which is a broader focus for different purposes.
---------------------------------------------------------------------------

4(b)(2) Deadline for Submission
    Proposed Sec.  1040.4(b)(2) would have stated 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 proposed 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 
proposed what it believed to be a relatively lengthy deadline because 
it expected that providers would continue to face arbitrations 
infrequently,\1095\ and, as a result, might not have a regularized 
process for redacting and submitting the required records. 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.
---------------------------------------------------------------------------

    \1095\ See Study, supra note 3, section 5 at 9 (stating that, 
from 2010 to 2012, 1,847 individual AAA cases, or about 616 per 
year, were filed for six consumer financial product markets).
---------------------------------------------------------------------------

    A group of State attorneys general commenters agreed generally with 
proposed Sec.  1040.4(b)(2), stating that some manner of timing 
obligation was needed to ensure that providers did not delay submitting 
required records to the Bureau. The group of State attorneys general 
also suggested that the Bureau establish a penalty regime for providers 
that fail to comply with proposed Sec.  1040.4(b)(2). An industry 
commenter requested a good cause exception from proposed Sec.  
1040.4(b)(2) in the event of natural disasters or unforeseen technical 
errors, on the grounds that any inadvertent non-compliance would result 
in further class action liability.
    The Bureau finalizes Sec.  1040.4(b)(2) as proposed. The Bureau 
does not agree with the group of State attorneys general that a new 
penalty regime is necessary to obtain the compliance of providers. The 
Bureau believes that the Dodd-Frank Act already contains sufficient 
penalty mechanisms to incentivize compliance with the deadlines set by 
Sec.  1040.4(b)(2).\1096\
---------------------------------------------------------------------------

    \1096\ See Dodd-Frank Act Section 1055(a)(1) (``The court (or 
the Bureau, as the case may be) in an action or adjudication 
proceeding brought under Federal consumer financial law, shall have 
jurisdiction to grant any appropriate legal or equitable relief with 
respect to a violation of Federal consumer financial law, including 
a violation of a rule or order prescribed under a Federal consumer 
financial law'').
---------------------------------------------------------------------------

    The Bureau also disagrees with the industry commenter that said 
that an explicit ``good cause'' exception is necessary given the time 
providers have to submit records required by Sec.  1040.4(b)(1). The 
commenter did not explain why a 60-day period was insufficient to cope 
with unexpected delays in complying with a relatively simple 
requirement--to electronically send a small quantity of documents to 
the Bureau. As to the industry commenter's concern that late-filing 
records in violation of Sec.  1040.4(b)(2) could lead to class action 
liability, there is no private right of action for a

[[Page 33384]]

provider's failure to comply with this Part.
4(b)(3) Redaction
The Bureau's Proposal
    Proposed Sec.  1040.4(b)(3) would have required 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 had proposed 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 purposes of 
gathering or analyzing the personally identifiable financial 
information of consumers.'' The Bureau stated that it had no intention 
of gathering or analyzing information that directly identifies 
consumers. At the same time, the Bureau sought to minimize the burden 
on providers by providing clear instructions for redaction.
    Accordingly, the Bureau had proposed 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 believed 
that these nine items would be easy for providers to identify and, 
therefore, that redacting them would impose minimal burden on 
providers. Proposed comment 4(b)(3)-1 would have clarified 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 have required 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 noted 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 have been 
required to be redacted pursuant to proposed Sec.  1040.4(b)(3)(i) 
through (v). This would have included 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 have required redaction of 
street addresses of individuals, but not cities, States, and zip codes. 
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 could 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 
information 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 have required 
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 have been 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 noted that it did not broadly propose to require 
providers to redact all types of information that could be deemed to be 
personally identifiable financial information (PIFI). Because Federal 
law prescribes a broad definition of PIFI,\1097\ the Bureau believed 
that generally 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 
proposed to require. As such, the list of items in proposed Sec.  
1040.4(b)(3)(i) through (ix) identified the examples of PIFI that the 
Bureau anticipated were likely to exist in the arbitral records that 
would be submitted under Sec.  1040.4(b)(1). The Bureau's preliminary 
view was that the list of items struck the appropriate balance between 
protecting consumer privacy and imposing a reasonable redaction burden 
on providers, particularly given that the Bureau proposed to conduct 
further review and redaction prior to any public release as discussed 
in the proposal and what is now new Sec.  1040.4(b)(5).
---------------------------------------------------------------------------

    \1097\ Federal regulations define ``personally identifiable 
financial information'' as ``any information: (i) A consumer 
provides to you to obtain a financial product or service from you; 
(ii) About a consumer resulting from any transaction involving a 
financial product or service between you and a consumer; or (iii) 
You otherwise obtain about a consumer in connection with providing a 
financial product or service to that consumer.'' 12 CFR 
1016.3(q)(1).
---------------------------------------------------------------------------

Comments Received
    The Bureau did not receive comments that addressed the specific 
categories of redactions set out in Sec.  1040.4(b)(3)(i) through (ix). 
Some comments expressed more general privacy concerns about the 
Bureau's proposed collection of materials, although these comments did 
not explicitly acknowledge that the Bureau had proposed to require 
redactions or state whether the proposed redactions actually addressed 
their concerns. Some industry commenters expressed general concerns 
that the submission of arbitration records would expose consumers to a 
risk of privacy and data security violations. These comments did not 
detail the nature of this risk. Another industry commenter expressed 
concern that the Bureau was forcing the exposure of the private data of 
consumers without their consent. Another industry commenter argued that 
the submission requirement compromised the privacy of the provider's 
employees.
Final Rule
    The Bureau finalizes Sec.  1040.4(b)(3)(i) through (ix) as 
proposed. The more general comments concerning privacy, data security, 
and employee confidentiality are addressed in Part VI.D. No comments 
suggested specific additional redactions to further minimize privacy 
risks to consumers or other parties, or suggested that additional 
categories of PIFI are likely to be included in records submitted under 
Sec.  1040.4(b)(1). The Bureau continues to believe that the redaction 
requirements substantially reduce privacy and data security risks. To 
address the concern one industry commenter expressed about the privacy 
of its employees' names, the Bureau affirms that Sec.  1040.4(b)(3)(i), 
which requires the redaction of the names of all individuals other than 
the arbitrator or the provider, applies to the names of providers' 
employees.
    The Bureau also finalizes proposed comment 4(b)(3)-1, now 
renumbered as comment 4(b)-2, as set out above. The Bureau received no 
comments on whether providers should be permitted to have another 
entity perform redactions, such as an arbitration

[[Page 33385]]

administrator or an agent of the provider.
4(b)(4) Internet Posting of Arbitration-Related Records
The Bureau's Proposal
    The Bureau stated in the proposal that it intended to publish 
arbitral records collected pursuant to proposed Sec.  1040.4(b)(1). The 
Bureau had considered whether to publish such records individually or 
in the form of aggregated data. Prior to publishing such records, the 
Bureau stated that it would have ensured that they had been redacted, 
or that the data was 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] or any other 
provision of law[] is not made public under this title.''
    The Bureau sought comment on the publication of the records that 
would have been required to be submitted by proposed Sec.  
1040.4(b)(1), including whether it should limit publication of 
particular items even after redaction based on particular consumer 
privacy concerns or whether commenters had other confidentiality 
concerns. Along similar lines, in the past some plaintiff's attorneys 
had noted their frustration with arbitral privacy. Some plaintiff's 
attorneys had noted in the past, for example, that arbitration did not 
allow them to file cases that can develop the law (because the outcomes 
are usually private and do not have precedential effect).\1098\ In 
addition, the Bureau sought comment on whether it should publish 
arbitral records individually or in the form of aggregated data. The 
Bureau also sought comment on whether there were alternatives to 
publication by the Bureau--such as publication by other entities--that 
would have furthered the purposes of publication described above.
---------------------------------------------------------------------------

    \1098\ 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.
---------------------------------------------------------------------------

Comments Received
    A number of commenters expressed general support for the Bureau's 
stated intention to publish the records it would receive. Academic, 
State attorneys general, and nonprofit commenters agreed that the 
Bureau should publish records it received. Specifically, academic 
commenters supported the publication of arbitration-related records and 
noted the importance of the publication of such records to academic 
research on consumer arbitration, which otherwise relied on the limited 
amount of data that arbitral administrators permitted non-parties to 
review. Academic, State attorneys general, and consumer advocate 
commenters also noted that the importance of such records to help 
regulators, including the Bureau and other State and Federal entities, 
analyze the impact of arbitration agreements on consumers. Consumer 
advocate commenters also suggested that the transparency created by 
publishing records would improve the quality of arbitrator decisions 
because arbitrators would know that their decisions would be 
scrutinized, would help providers that were not parties to the 
arbitration understand what activities might run afoul of the law, and 
might help consumers themselves learn to avoid harms.
    A number of other commenters generally opposed the Bureau's stated 
intention of publishing records received. Several industry commenters 
expressed the concern that plaintiff's attorneys would review the 
published arbitration-related records and file frivolous claims, 
including class action litigation and individual arbitration 
proceedings regarding the claims made in the published records. A 
commenter that is an association of State regulators opposed the 
publication of records on the grounds that it would lead to more class 
action cases, which would exacerbate the difficulties of regulators' 
assessing the risks posed by class actions to providers. An industry 
commenter expressed the concern that the published records themselves 
would be the subject of class action litigation against providers that 
made any errors in redacting submitted records as required by proposed 
Sec.  1040.4(b)(1), or that failed to include the language required by 
proposed Sec.  1040.4(a)(1) in pre-dispute arbitration agreements. The 
commenter also suggested that the Bureau itself pursue any important 
information derived from the records rather than permitting third 
parties to review and exploit such information.
    Another industry commenter suggested that the Bureau should not 
publish arbitral records because the Bureau's existing consumer 
complaint database already serves a similar function in publishing data 
on consumer disputes.
    A commenter that is an association of State regulators opposed the 
Bureau's publication of records on the grounds that such a rule may 
conflict with State laws regarding the confidentiality of arbitral 
records. Industry commenters opposed the publication of records on the 
grounds that the rule would disregard confidentiality as a standard 
feature of arbitration.
    Finally, some industry commenters requested an additional round of 
notice and comment on the Bureau's intent to publish records, 
especially to comment on the particulars of the process by which the 
Bureau intends to collect, secure, and disseminate arbitration data.
The Final Rule
    The Bureau is finalizing new Sec.  1040.4(b)(4), under which the 
Bureau shall establish and maintain on its Web site a central 
repository of the records collected pursuant to Sec.  1040.4(b)(1). 
Section 1040.4(b)(4) requires that the Bureau make the arbitration-
related records it collects from providers easily accessible and 
retrievable by the public on its Web site. In practice, the Bureau 
expects to comply with this rule by publishing the records, further 
redacted, if necessary, in accordance with new Sec.  1040.4(b)(5), as 
discussed below, as PDF files. The Bureau expects that such records 
will be made searchable by the text of the records, as well as by date, 
the name of the arbitration administrator, the name of the provider and 
the type of consumer financial product or service at issue.
    As discussed in detail in Part VI.D, the Bureau continues to 
believe it is important to publish the records it collects, with 
appropriate redactions. The Bureau believes that its experience with 
the Study and other market monitoring efforts has clarified the 
importance of publishing arbitration records to assist research (by 
academics and policymakers) on consumer finance arbitration and to help 
regulators, including the Bureau and other State and Federal bodies, to 
analyze consumers' experiences with arbitration and determine if 
further action is needed. The Bureau agrees that the publication of 
these records--including records on the resolution of arbitrations 
(many of which will not be available in published litigation records)--
will also assist parties in arbitration and litigation more accurately 
determine whether their claims or defenses are likely to succeed or 
fail. The Bureau understands from the Study that most records 
pertaining to consumer financial arbitrations are kept private. 
However, such privacy is not inherent to arbitration, given that other 
arbitration fora publish individual arbitration records by default 
(such as FINRA), and

[[Page 33386]]

that AAA has begun to publish records of some consumer 
arbitrations.\1099\
---------------------------------------------------------------------------

    \1099\ FINRA, ``Awards,'' at Rule 12904(h) (``All awards shall 
be made publicly available.''); AAA Consumer Arbitration Statistics, 
supra note 804.
---------------------------------------------------------------------------

    As discussed above in connection with final Sec.  
1040.4(b)(1)(i)(D), the Bureau agrees with consumer advocate commenters 
that suggested that collecting and publishing records might improve the 
quality of some arbitrators' decisions because they know that their 
decisions may be more broadly scrutinized. The records that the Bureau 
reviewed in the Study suggested that arbitration awards were short or 
summary in nature at least compared to reasoned decisions in 
litigation; the Bureau believes that if publication results in more 
fulsome arbitrator decisions, this would be an added benefit of the 
rule.
    The Bureau further agrees with the consumer advocate commenter that 
suggested that the publication of records will likely help providers 
understand what activities might run afoul of the law, and would help 
consumers learn about certain harmful practices resulting in arbitral 
awards for consumers. For example, the AAA consumer arbitration records 
the Bureau reviewed in the course of its Study contained filings on 
subjects that were not found in individual litigation. The Bureau 
agrees with industry commenters that the publication of records may 
lead to some class action litigations, but the Bureau disagrees that 
any increase is necessarily detrimental, as set out in its analysis of 
class actions in the findings section above. The Bureau disagrees that 
the act of producing the records themselves would be the subject of 
class action litigation against providers. While providers may make 
errors in redacting records as required by Sec.  1040.4(b)(3) or may 
make errors in inserting into pre-dispute arbitration agreements the 
language required under Sec.  1040.4(a)(1), the rule is not privately 
enforceable and the Bureau will further review and redact records 
before publishing. In any event, the Bureau does not expect such class 
actions could occur given the low number of arbitrations per company. 
The Bureau agrees that it should pursue and further investigate 
important information derived from the records it receives. The Bureau 
disagrees however that this information should be limited to the Bureau 
alone rather than to the public and other enforcement agencies. Making 
arbitration records transparent via publication would permit third 
parties--including private litigants and other regulators--to also 
monitor arbitration for fairness issues.
    The Bureau disagrees with the industry commenter that suggested 
that the Bureau's existing consumer complaint database can serve the 
same function as a dedicated page or area on the Bureau's Web site 
focused on arbitral records and that an arbitration database would be 
duplicative of the complaint database. The complaint database is not 
designed to receive or publish the variety of arbitration records that 
providers are required to submit pursuant to this rule.
    The Bureau disagrees with industry commenters as it does not 
believe that the Bureau's publication of records would conflict with 
State laws on the confidentiality of arbitral records. Published 
records will be redacted, by providers and by the Bureau, and thus the 
Bureau will take steps to appropriately reduce re-identification risk 
to individuals who are parties to the arbitrations. The Bureau also 
disagrees with industry commenters that confidentiality is standard in 
consumer arbitration. As noted above, many other arbitration 
administrators publish their decisions, most notably AAA and FINRA, 
which publishes records in all arbitrations without redacting the names 
of individuals. The AAA, further, already publishes some case-level 
information on individual consumer arbitrations.\1100\ Further, 
prevailing parties in arbitrations routinely make such awards public in 
their filings to enforce them in court.\1101\ In any event, to the 
extent that there is a conflict with State law and the rule, the Bureau 
finds that rule would govern and would be in the public interest.
---------------------------------------------------------------------------

    \1100\ AAA Consumer Arbitration Statistics, supra note 804.
    \1101\ See, e.g., 9 U.S.C. 9 (Federal Arbitration Act provision 
setting out procedures for the enforcement of awards).
---------------------------------------------------------------------------

    The Bureau disagrees with the industry commenter that an additional 
round of notice and comment is necessary to detail the process by which 
the Bureau intends to collect, secure and disseminate arbitration data. 
The proposal specifically solicited comments on the Bureau's intention 
to publish arbitration-related records, and sought comments on how the 
Bureau should publish arbitration-related records it received.\1102\ 
Many providers offered comments on the scope of the Bureau's monitoring 
proposal, as summarized above. Further, new provisions discussed below 
offer details on the collection and submission of documents, including 
deadlines for providers to submit documents, deadlines for the Bureau 
to publish documents, and the address where redacted records will be 
posted.
---------------------------------------------------------------------------

    \1102\ 81 FR 32830, 32893 (May 24, 2016) (``[T]he 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.''); see also id. (``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.'').
---------------------------------------------------------------------------

    The Bureau expects to release details of how providers should 
comply with the requirements of Sec.  1040.4(b) in due course. The 
Bureau expects that such instructions will be published in the Federal 
Register, the Bureau's Web site, and in a small business compliance 
guide the Bureau will publish to assist companies redact and submit in 
accord with the final rule.
4(b)(5) Further Redaction Prior to Internet Posting
    The Bureau sought comment on the publication of the records that 
would have been required to be submitted by proposed Sec.  
1040.4(b)(1), including whether it should limit publication of 
particular items even after redaction based on particular consumer 
privacy concerns or whether commenters had other confidentiality 
concerns.
    Industry commenters asserted that the collection of both public and 
non-public information by financial regulators poses a threat to 
consumer privacy. One industry commenter argued that the collection of 
even redacted records, combined with other publicly available 
information, could be used to re-identify consumers. One industry 
commenter expressed skepticism about permitting government regulators 
to collect data because of data security issues at financial regulators 
and reports about data security at the Bureau.\1103\
---------------------------------------------------------------------------

    \1103\ The commenter referred to an Office of the Inspector 
General report on the security of the Bureau's complaints database. 
See Office of the Inspector General, ``Security Control Review of 
the CFPB's Data Team Complaint Database,'' (July 23, 2015), 
available at https://oig.federalreserve.gov/reports/cfpb-dt-complaint-database-summary-jul2015.htm (finding overall that the 
Bureau had taken steps to secure the Complaint Database, identifying 
needed improvements, and acknowledging that the Bureau agreed with 
OIG's recommendations and would take steps to make improvements).
---------------------------------------------------------------------------

    For the reasons provided below, the Bureau is finalizing new Sec.  
1040.4(b)(5),

[[Page 33387]]

which will require the Bureau to make such further redactions as are 
needed to comply with applicable privacy laws. In particular the Bureau 
will review records submitted by providers to ensure that providers' 
redactions were made in compliance Sec.  1040.4(b)(3). In addition, 
before publishing records pursuant to Sec.  1040.4(b)(4), the Bureau 
will, to the extent necessary, make further redactions to records to 
appropriately reduce the risk of re-identification.
    The Bureau disagrees with the industry commenter that said that the 
Bureau's collection of public and non-public information by financial 
regulators poses a threat to consumer privacy. Section 1040.4(b)(3) 
will require providers to redact personal and financial information 
before the records ever reach the Bureau. In addition, the Bureau will 
employ the same data security measures that it employs for other 
sensitive data that it currently maintains.
4(b)(6) Deadline for Internet Posting of Arbitral and Court Records
    The Bureau adopts final Sec.  1040.4(b)(6), under which the Bureau 
shall begin to make records submitted to the Bureau by providers under 
final Sec.  1040.4(b)(1) accessible and retrievable by the public on 
the Bureau's Web site no later than July 1, 2019, and at least annually 
each year thereafter for documents received by the end of the prior 
calendar year.
    The Bureau believes that making records available on a timely basis 
will make them most useful to third parties. For instance, State and 
Federal regulators may need access to recent records if they are to be 
effectively responsive to potentially problematic business practices or 
unfairness in arbitration proceedings early in their existence. 
Similarly, private attorneys may need access to recent records to more 
effectively guide their forecasting of the success of claims and 
defenses in arbitration and litigation. Were the Bureau to delay such 
action, the information could become stale and less useful. The Bureau 
believes based on its experience with other data posting that an annual 
cycle strikes an appropriate and practicable balance in light of Bureau 
resources.

Section 1040.5 Compliance Date and Temporary Exception

    Proposed Sec.  1040.5 would have 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. Below, the Bureau addresses the comments 
received on these proposed provisions.
5(a) Compliance Date
    Dodd-Frank section 1028(d) 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, as 
established by the Bureau.'' As the proposal stated, the Bureau 
interprets this language to mean that the rule may begin to apply on 
the 181st day after the effective date, as this day would be the first 
day ``after the end of'' the 180-day period starting on the effective 
date as is required by section 1028(d). Given that the Bureau proposed 
an effective date of 30 days after publication of the rule in the 
Federal Register, compliance with the proposal would have been required 
starting on the 211th day after publication of the rule in the Federal 
Register. Proposed Sec.  1040.5(a) would have adopted the term 
``compliance date'' to refer to this date and would have stated that 
compliance with part 1040 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.\1104\
---------------------------------------------------------------------------

    \1104\ Proposed Sec.  1040.5(a) would have instructed the Office 
of the Federal Register to insert a specific date upon publication 
in the Federal Register.
---------------------------------------------------------------------------

    The Bureau proposed a 30-day effective date based on Administrative 
Procedure Act (APA) section 553(d), 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.\1105\ As the 
Bureau explained in the proposal, the Bureau did not believe that a 
longer period for the effective date was needed to facilitate 
compliance, given that section 1028(d) mandates an additional 180-day 
period between the effective date and the compliance date. The Bureau 
stated in the proposal that it believes that a 211-day period between 
Federal Register publication and the compliance date (referred to 
herein as the ``compliance period'') would afford providers sufficient 
time to comply.\1106\
---------------------------------------------------------------------------

    \1105\ 5 U.S.C. 553(d).
    \1106\ Proposed Sec.  1040.5(b) would have created a limited, 
temporary exception for certain pre-packaged general-purpose 
reloadable prepaid card agreements.
---------------------------------------------------------------------------

    Three commenters--a consumer advocate, an individual, and a 
research center--urged the Bureau to adopt Sec.  1040.5(a) as proposed. 
An industry trade association commenter stated that it supported Sec.  
1040.5(a) as long as the rule ``is not retroactive to accounts opened 
prior to the implementation date.'' Other commenters requested that the 
Bureau modify the compliance period. Two industry commenters urged the 
Bureau to adopt a longer compliance period. One of these industry 
commenters, a trade association representing the consumer credit 
industry, requested a compliance period of 18 months, which would be an 
additional 11 months beyond what the Bureau had proposed. The commenter 
asserted that the Bureau had underestimated how time-consuming the 
required contractual changes would be for some providers. For example, 
according to the commenter, many States have a single document rule 
that limits the ability of vehicle finance companies to modify 
contracts with an addendum or side letter, so that such companies need 
sufficient time to modify the agreements themselves and provide them to 
dealers well before the effective date. The commenter also stated that 
one of its members had more than 200 forms that the provider would need 
to revise, check, correct, review, and approve. According to the 
commenter, finance companies typically modify contracts in batches; 
each batch can take three to five months; and that printing, 
distribution, and implementation would take additional time. The 
commenter also asserted that removing a ``Notice of Arbitration'' 
signature box would cause programming issues for automobile dealers. 
Additionally, the commenter also stated that if the Bureau does not 
extend the compliance date, it should adopt a safe harbor within which 
providers would not face potential consequences for having non-
compliant agreements so long as the provider does not enforce the 
arbitration agreements in a class action.
    The other industry commenter, a small-dollar lender, requested a 
compliance period of 452 days. This commenter stated that it would need 
to revise its agreements to include the contract provision required by 
proposed Sec.  1040.4(a)(2) and that it may also remove its arbitration 
provisions. The commenter noted that it had at least 113 separate 
consumer agreements or disclosure documents containing arbitration 
agreements. According to the commenter, 211 days is not enough time to 
program, test, and deploy 113 new agreements, especially given that it 
uses four different point-of-sale software systems (in addition to its 
primary software package). The commenter also noted that it would need 
to destroy non-complaint hard-copy agreements at each

[[Page 33388]]

of its storefronts and replace them with new hard-copy agreements. 
Additionally, one consumer advocate commenter urged the Bureau to 
shorten the compliance period to 90 days or 180 days.
    The Bureau is finalizing Sec.  1040.5(a) as Proposed except that it 
is extending the effective date by an additional 30 days, to 60 days 
after publication in the Federal Register, and is making one technical 
correction. While the proposal stated that compliance with part 1040 is 
required for any pre-dispute arbitration agreement entered into after 
the compliance date, the final rule states that compliance with part 
1040 is required for any pre-dispute arbitration agreement entered into 
on or after the compliance date.\1107\ The Bureau intended proposed 
Sec.  1040.5(a) to convey that providers would be required to comply 
starting on the compliance date. The Bureau believes the phrase ``on or 
after'' the compliance date better captures this intent.\1108\
---------------------------------------------------------------------------

    \1107\ Like the proposal, final Sec.  1040.5(a) would instruct 
the Office of the Federal Register to insert a specific date upon 
publication in the Federal Register.
    \1108\ In this preamble, the Bureau uses the terms ``on or after 
the compliance date'' and ``after the compliance date'' 
interchangeably.
---------------------------------------------------------------------------

    Regarding the industry trade association's comment about 
retroactivity, the Bureau notes that the rule would not have 
retroactive effect. As is explained above in the section entitled 
``Comments on the Bureau's Interpretation of Entered Into,'' this part 
will only apply to agreements entered into after the compliance date. 
Regarding the consumer advocate's comment that urged the Bureau to 
adopt a shorter compliance period, the Bureau declines to adopt a 
compliance period of 90 or 180 days because it believes that a 
compliance period that includes a 180-day period after the effective 
date is most consistent with its authority under section 1028(d) of the 
Dodd-Frank Act and the APA.\1109\
---------------------------------------------------------------------------

    \1109\ See Dodd-Frank section 1028(d) (stating that any rule 
prescribed by the Bureau under section 1028(b) shall apply to 
agreements entered into after the end of the 180-day period 
beginning on the effective date of the regulation) and APA section 
553(d) (stating that, in general, the required publication or 
service of a substantive rule shall be made not less than 30 days 
before its effective date).
---------------------------------------------------------------------------

    The Bureau is adopting a compliance period that is one month longer 
than the compliance period in the proposal, for a total of 
approximately eight months, and declines to adopt a longer compliance 
period because the Bureau does not believe that the contractual change 
required by this rule will take more than eight months to implement 
(except for certain prepaid providers, as is discussed below). The 
Bureau acknowledges--as noted by the industry trade association 
commenter and small-dollar lender commenter--that some providers will 
need to implement revisions to a large number of consumer agreements 
and related forms. However, the Bureau believes that the revisions 
required for each document will be modest, and the Bureau notes that 
providers do not provide evidence to the contrary. The rule requires 
only that providers insert either the provision mandated by Sec.  
1040.4(a)(2)(i) or the alternative provision permitted by Sec.  
1040.4(a)(2)(ii)--and the Bureau has already provided the specific 
language for these provisions with a view toward reducing burden. 
Because both of these revisions are modest, the Bureau believes that 
making them will not impose a substantial burden, even where providers 
have multiple agreements. And by making the effective date 30 days 
later than it had proposed, the Bureau is providing additional time for 
this to be completed. The Bureau believes that providers can make these 
modest revisions and update their software or deliver hard copies of 
agreements, as needed, within 241 days.\1110\
---------------------------------------------------------------------------

    \1110\ Regarding the industry trade association's comment that 
removing a ``Notice of Arbitration'' signature box would cause 
programming issues for automobile dealers, the rule does not require 
providers to remove it, because the rule does not ban the use of 
pre-dispute arbitration agreements.
---------------------------------------------------------------------------

    The Bureau has carefully considered whether providers of certain 
products may have difficulty complying within 241 days and is adopting 
a temporary exception for pre-packaged general-purpose reloadable 
prepaid card agreements under Sec.  1040.5(b). In addition, the Bureau 
expects that the vast majority of 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. The Bureau is aware, as the industry trade 
industry commenter noted, that providers subject to a single-document 
rule will not be able to use a separate notice or amendment. For this 
reason, the Bureau has considered whether such providers should be 
eligible for the temporary exception in Sec.  1040.5(b). The Bureau has 
decided not to make such providers eligible for the Sec.  1040.5(b) 
exception, because the Bureau believes--for the reasons stated in the 
paragraph above--that the compliance period affords enough time to 
update consumer agreements while complying with applicable single-
document rules. As a result, the Bureau does not believe a safe harbor 
is needed.
5(b) Exception for Pre-Packaged General-Purpose Reloadable Prepaid Card 
Agreements
    As described above, Sec.  1040.5(a) states that compliance with 
part 1040 is required starting on the 241st day after publication of 
the final rule in the Federal Register. As of this date, providers 
would, among other things, be required to ensure that their pre-dispute 
arbitration agreements contain the provision required by Sec.  
1040.4(a)(2)(i) or the alternative provision permitted by Sec.  
1040.4(a)(2)(ii). As stated above, the Bureau believes this period 
generally affords providers sufficient time to comply.
    As the proposal stated, however, the Bureau assessed whether this 
compliance period may pose special difficulties for providers of 
certain types of products. The Bureau was concerned that providers of 
certain types of GPR prepaid cards may not be able to ensure that only 
compliant products are offered for sale or provided to consumers after 
the compliance date. Prepaid providers typically enclose cards in a 
package that contains a card and a cardholder agreement.\1111\ 
Providers typically print these packages well in advance of sale and 
are distributed to consumers through third-party retailers such as 
drugstores, check cashing stores, and convenience stores. To comply 
with the rule by the compliance date, providers of such products would 
need to search each retail location that sells their products for any 
non-compliant packages; remove them from the shelves; and print new 
packages. The Bureau believes that this process would involve 
considerable expense and that this represents a unique situation not 
present with other products and services that proposed part 1040 would 
have covered.
---------------------------------------------------------------------------

    \1111\ See 81 FR 83934 (Nov. 22, 2016).
---------------------------------------------------------------------------

    For these reasons, proposed Sec.  1040.5(b) would have established 
a limited exception from proposed Sec.  1040.4(a)(2)'s requirement that 
the provider's pre-dispute arbitration agreement contain a specified 
provision by the compliance date. Proposed Sec.  1040.5(b) would have 
stated 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 could not contact the consumer in writing, proposed Sec.  
1040.5(b)(1) would have set forth the following conditions: (1) The 
consumer

[[Page 33389]]

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 had the ability to contact the consumer in writing, 
proposed Sec.  1040.5(b)(2) would have imposed the previous three 
conditions as well as one additional requirement: Within 30 days of 
obtaining the consumer's contact information, the provider would have 
been required to provide to the consumer an amended pre-dispute 
arbitration agreement that is compliant with proposed Sec.  
1040.4(a)(2). Proposed comment 5(b)(2)-1 would have clarified that the 
30-day period would not begin to elapse until the provider is able to 
contact the consumer and would also have stated that a provider is able 
to contact the consumer when, for example, the provider has the 
consumer's mailing address or email address.
    As the proposal stated, this exception would have permitted 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 
proposal also noted that proposed Sec.  1040.5(b)(2) would not have 
imposed on providers an obligation to obtain a consumer's contact 
information. Where providers are able to contact the consumer in 
writing, the Bureau expected that they could satisfy proposed Sec.  
1040.5(b)(2) by, for example, sending the compliant agreement to the 
consumer when the consumer called to register the account and provided 
a mailing address or email address; sending the revised terms when the 
provider sent a personally-embossed card to the consumer; or 
communicating the new terms on the provider's Web site.
    In the proposal, the section-by-section analysis clarified that 
providers availing themselves of the exception in proposed Sec.  
1040.5(b) would still have been required to comply with proposed Sec.  
1040.4(a)(1) and proposed Sec.  1040.4(b) as of the compliance date. 
Pursuant to proposed Sec.  1040.4(a)(1), such providers would still 
have been 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. The amended pre-dispute arbitration agreement submitted by 
providers in accordance with proposed Sec.  1040.5(b)(2)(ii) would have 
been 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). In addition, providers would still have been required 
to submit certain arbitral records to the Bureau, pursuant to proposed 
Sec.  1040.4(b), in connection with pre-dispute arbitration agreements 
entered into after the compliance date. The Bureau also stated in the 
proposal that it did 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 GPR prepaid product (although the Bureau would expect that 
corresponding product Web sites would contain an accurate arbitration 
agreement).
    The Bureau received several comments on proposed Sec.  1040.5(b). A 
consumer advocate commenter urged the Bureau not to adopt proposed 
Sec.  1040.5(b), expressing concern that the provision would give 
providers an incentive to package a large supply of cards before the 
compliance date in an effort to use misleading agreements for as long 
as possible after the compliance date. The commenter requested that, if 
the Bureau adopts Sec.  1040.5(b), the Bureau should (1) add commentary 
stating that, even for providers covered by Sec.  1040.5(b), proposed 
Sec.  1040(a)(1) continues to apply; (2) limit the exception to GPR 
prepaid cards not in the provider's possession after the compliance 
date (as opposed to GPR prepaid cards packaged before the compliance 
date); (3) limit the exception to GPR prepaid cards packaged 60 days 
after Federal Register publication, not 211 days; and (4) require 
providers to deactivate non-compliant card packages that have not been 
activated six months after the compliance date. The commenter also 
stated that it supported proposed Sec.  1040.5(b)(2)(ii)'s requirement 
that providers able to contact the consumer in writing provide the 
consumer with an amended pre-dispute arbitration agreement.
    Additionally, a research center commenter stated that the Bureau 
should craft the exception narrowly and apply it only where necessary. 
The commenter pointed out that, even though proposed Sec.  1040.4(a)(1) 
would still apply, it may be unclear whether a given agreement is 
covered by Sec.  1040.4(a)(1), as there may not be evidence of whether 
the consumer purchased the prepaid card (and thereby entered into the 
agreement) before or after the compliance date.
    The Bureau also received a comment from an industry trade 
association representing prepaid card providers. This commenter 
expressed concern that the proposal would be burdensome for providers 
in combination with the Bureau's prepaid account rule (which, after the 
close of the comment period for this rule, the Bureau published in 
November 2016).\1112\ The commenter asserted that, even with the 
proposed temporary exception, providers would ``incur the double 
expense'' of having to update their disclosures and related materials a 
second time to comply with the Bureau's arbitration rule. The commenter 
also stated that GPR prepaid providers may have to pull products off 
retail store shelves on multiple occasions within a relatively short 
period.
---------------------------------------------------------------------------

    \1112\ 81 FR 83934 (Nov. 22, 2016).
---------------------------------------------------------------------------

    The Bureau adopts Sec.  1040.5(b) and comment 5(b)(2)-1 as proposed 
with a minor revision to comment 5(b)(2)-1 for clarity.\1113\ As stated 
above, the Bureau believes the exception is warranted because it would 
allow prepaid card providers to avoid the considerable expense of 
pulling and replacing packages at retail stores.\1114\ At the same 
time, the impact of the exception on consumers would be limited, 
because Sec.  1040.4(a)(1) would continue to apply, and because Sec.  
1040.5(b)(2)(ii) would require providers to provide amended agreements 
to consumers where feasible.
---------------------------------------------------------------------------

    \1113\ The comment gives a more specific example of when the 
provider has the consumer's mailing or email address, referring to 
when the consumer registers the card and gives that information to 
the provider.
    \1114\ In the Prepaid Rule, the Bureau similarly adopted a 
disclosure regime that does not require providers to pull non-
compliant materials from store shelves. Id.
---------------------------------------------------------------------------

    The Bureau is persuaded that adding a comment clarifying that Sec.  
1040.4(a)(1) remains in effect, even where the temporary exception 
applies, would help consumers better understand their rights, and 
providers better understand their obligations, under the rule. For this 
reason, the final rule includes new comment 5(b)-1, which states that, 
where Sec.  1040.4(a)(2) does not apply to a provider that enters into 
a pre-dispute arbitration agreement on or after the compliance date by 
virtue of the temporary exception in Sec.  1040.5(b)(2), the provider 
must still comply with Sec.  1040.4(a)(1), which generally prohibits 
reliance on a pre-dispute arbitration agreement in a class action 
related to a covered consumer financial product or service. The Bureau 
declines to limit the

[[Page 33390]]

exception to GPR prepaid cards not in the provider's possession after 
the compliance date. The Bureau believes that when an agreement is 
packaged is a clearer compliance standard than whether a package is in 
the provider's possession. Further, the Bureau believes that any 
incentive to package large quantities of cards before the compliance 
date (a form of potential evasion suggested by one commenter) will be 
limited because the incremental benefit of doing so is limited, as 
Sec.  1040.4(a)(1) would continue to apply; and because many providers 
will be required to contact their customers and provide the consumer an 
amended agreement (pursuant to Sec.  1040.5(b)(2)(ii)).
    The Bureau also declines to limit the exception to GPR prepaid 
cards packaged no more than 60 days after publication in the Federal 
Register. This approach could be construed to impose a 60-day 
compliance period on GPR prepaid card providers after which they would 
have to pull-and-replace non-compliant agreements at significant 
expense, and the Bureau does not believe a shorter compliance period 
for GPR prepaid card providers--compared with the 241 days afforded 
other providers--is legally permissible under section 1028(d). In 
addition, the Bureau declines to require providers to deactivate non-
compliant, un-activated card packages six months after the compliance 
date. Such a requirement would be quite costly and the Bureau does not 
believe such a requirement is necessary, because limiting the exception 
to cards packaged before the compliance date will have the same overall 
effect; once that stock of agreements dissipates, only compliant 
agreements will be available on store shelves. Further, such a rule 
would effectively require providers to identify non-compliant products 
at retail locations and remove them--the very burden that the temporary 
exception was designed to alleviate.
    The Bureau disagrees with the research center's comment that it may 
be unclear whether a given prepaid card agreement is subject to Sec.  
1040.4(a)(1) because there may not be evidence of when the consumer 
purchased the card (and, consequently, whether the consumer entered 
into it before or after the compliance date). Based on its knowledge of 
the prepaid card market, the Bureau believes that, while the provider 
may not know the identity of the consumer unless the card is 
registered, the provider does know, for a particular card, when the 
consumer purchased it (and, accordingly, whether that occurred before 
or after the compliance date).
    Regarding the industry trade association commenter's concern about 
compliance burden due to the Bureau's final prepaid account rule, the 
Bureau believes these concerns are misplaced. As stated above, the 
Bureau recognizes that compliance with part 1040 may be more difficult 
or costly for some prepaid providers because of the way some prepaid 
products are packaged and sold. For this reason, the Bureau is adopting 
Sec.  1040.5(b). However, the Bureau does not believe that compliance 
with part 1040 will impose a substantial burden on prepaid providers in 
conjunction with the Bureau's finalization of the prepaid account rule. 
Both rules require revisions to account agreements. However, both rules 
also contain lengthy compliance periods (approximately 18 months for 
the prepaid account rule, including an additional six months the Bureau 
provided industry to give it sufficient time to implement the 
rule,\1115\ and approximately eight months for part 1040). Further--for 
the reasons described in detail in the section-by-section analysis for 
Sec.  1040.5(a), above--the Bureau believes that the contractual change 
required by part 1040 is modest, especially because the Bureau is 
providing the language for the required contract provision. The Bureau 
also notes that, contrary to the commenter's assertion, part 1040 would 
not require providers to pull and replace products from store shelves 
(indeed, as stated above, the purpose of Sec.  1040.5(b) is to prevent 
providers from having to do so).
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    \1115\ Prepaid Accounts Under the Electronic Fund Transfer Act 
(Regulation E) and the Truth in Lending Act (Regulation Z). 82 FR 
18975 (Apr. 25, 2017).
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VIII. Dodd-Frank Act Section 1022(b)(2) Analysis

A. Overview

    In developing this final rule, the Bureau has considered the 
potential benefits, costs, and impacts as 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, 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.
    In the proposal, the Bureau set forth a preliminary analysis of 
these effects, and the Bureau requested comments and submissions of 
additional data that could inform the Bureau's analysis of the 
benefits, costs, and impacts of the proposal. In response, the Bureau 
received a number of comments on the topic. 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. Commodity Futures Trading Commission, the 
U.S. Securities and Exchange Commission, and the Federal Communications 
Commission. The consultations regarded 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 
final provisions as compared to the status quo in which some, but not 
all, consumer financial products or services providers in the affected 
markets (see Sec.  1040.2(c), defining the entities covered by this 
rule as ``providers'') use arbitration agreements.\1116\ The baseline 
considers economic attributes of the relevant markets and the existing 
legal and regulatory structures applicable to providers. The Bureau 
requested

[[Page 33391]]

comment on this baseline, and did not receive any suggesting an 
alternative.
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    \1116\ 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 
documented a slight but gradual increase in the adoption of 
arbitration agreements by industry in particular markets. See 
generally Study, supra note 3, 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. Nonetheless, for simplicity and transparency, the Bureau 
assumed that, in the absence of a final rule, the prevalence of 
arbitration agreements would remain constant. As a result, the 
baseline that the Bureau used assumes that a significant amount of 
class litigation would remain regardless of whether the proposal was 
finalized. If the Bureau had instead used the hypothetical future 
state of universal adoption of arbitration agreements as the 
baseline, the estimated impact, both of benefits and costs would be 
significantly larger.
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    The Bureau invited comment on all aspects of the data that it has 
used to analyze the potential benefits, costs, and impacts of the 
proposed provisions.\1117\ 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 final rule are especially limited. As a result, 
portions of this analysis rely in part on general economic principles 
and the Bureau's experience and expertise in consumer financial markets 
to provide a qualitative discussion of the benefits, costs, and impacts 
of the final rule.
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    \1117\ The estimates in this analysis are based upon data 
obtained and statistical analyses performed by the Bureau. This 
included much of the data underlying the Study and some of the 
Study's results. The collection of the data underlying the Study was 
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 was 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 was discussed further below in Parts VIII and IX.
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    The Bureau also discussed and requested comment on several 
potential alternatives, including ones that would be applicable to 
larger entities as well as smaller entities, which it listed in the 
proposal's Initial Regulatory Flexibility Analysis (IRFA) and also 
referenced in its Section 1022(b)(2) Analysis. A further detailed 
discussion of potential alternatives considered is provided in Section 
G of this Section 1022(b)(2) Analysis and in the Final Regulatory 
Flexibility Analysis (FRFA) in Part IX below.
    In this analysis, the Bureau focuses on the benefits, costs, and 
impacts of the two major elements of the final rule: (1) The 
requirement that providers with arbitration agreements include a 
provision in the arbitration agreements they enter into 180 days after 
the effective date of the rule stating that the arbitration agreement 
cannot be invoked in class litigation, and the related prohibition that 
would forbid providers from relying on such an agreement in a case 
filed as a class action; and (2) the requirement that providers using 
pre-dispute arbitration agreements submit certain records relating to 
arbitral proceedings and certain court records to the Bureau.
    The impact of submitting arbitral and court records to the Bureau 
is expected to be minor, as identified in this analysis and the 
Bureau's PRA analysis further below. This impact is slightly higher 
than the PRA impact estimated in the proposal, principally due to the 
addition of Sec.  1040.4(b)(1)(i)(B) and (b)(1)(iii), which requires 
providers to submit answers to arbitration claims and arbitration 
motions filed in court to the Bureau.
    Given that the Bureau takes the status quo as the baseline, the 
analysis below focuses on providers that currently have arbitration 
agreements. 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 enter into with consumers. For these providers, which constitute 
the vast majority of providers using arbitration agreements, the Bureau 
believes that the final class rule will 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 use arbitration 
agreements contained in consumers' contracts entered into by another 
covered person, such as another provider. 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 final 
rule will 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 contain arbitration agreements and from 
consumers whose contracts do not contain arbitration agreements. Thus, 
these debt collectors already face class litigation risk, but this risk 
will increase, at most, in proportion to the fraction of the providers' 
consumers whose contracts contain arbitration agreements.\1118\ The 
actual magnitude by which debt collectors' risk will increase is likely 
to 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.\1119\
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    \1118\ 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 
under the final rule.
    \1119\ A research center commenter asserted that debt collectors 
are never able to rely on arbitration agreements between consumers 
and creditors. In fact, the Study contradicted this assertion, as 17 
of 94 putative class cases with motions to compel arbitration 
involved FDCPA claims. See Study, supra note 3, section 6 at 56 
n.94. See also SBREFA Report, supra note 419, at 17 (summarizing 
comments from representatives of debt collectors who stated that, in 
some instances, debt collectors can rely on arbitration agreements). 
As is further noted below, at least one trade association 
representing debt collectors also said the ability of debt 
collectors to rely on creditor arbitration agreements was more 
uncertain.
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    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 providers.
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 provided the economic framework through which it 
considered those factors in order to more fully inform the rulemaking, 
and in particular to describe the market failure that is the basis for 
the final rule.\1120\ This framework is set forth below, followed by a 
discussion of related comments.
---------------------------------------------------------------------------

    \1120\ Although Dodd-Frank 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.
---------------------------------------------------------------------------

    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 finalizing both the class proposal and the requirement to submit 
arbitral records, the Bureau is focusing on a related market failure: 
Reduced incentives for providers to comply with the underlying laws, 
due to an insufficient level of enforcement.
    While the Bureau assumes that the underlying laws address a range 
of

[[Page 33392]]

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. In 
addition, 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 experience and expertise in 
overseeing consumer finance markets, that in general the current 
incentives to comply are weaker than the economically efficient levels. 
That is, in general, the economic costs of increased compliance are 
currently less than the economic benefits stemming from compliance. 
Thus, increased compliance due to the additional incentives provided by 
the final rule would, in general, be justified by the economic benefits 
of this increased compliance. It may be, however, that in some 
particular cases or particular markets compliance is already at or 
above the optimal level, such that the increased compliance due to the 
final rule will lower economic welfare. The data and methodologies 
available to the Bureau do not allow for an economic analysis of the 
optimal level of compliance on a law-by-law or market-by-market 
basis.\1121\ However, for purposes of this discussion, the Bureau 
assumes that the current level of compliance in consumer finance 
markets is generally sub-optimal.
---------------------------------------------------------------------------

    \1121\ The Bureau sought comment and data that would allow 
further analysis of how to determine the point at which 
strengthening incentives might become inefficient. While some 
commenters asserted that current levels of compliance (and thus 
incentives) are efficient, they did not provide data nor any means 
of analyzing that assertion.
---------------------------------------------------------------------------

    The Bureau also believes it may be useful to clarify what this 
rulemaking is not intended to address. In particular, contrary to the 
view expressed by several commenters, the Bureau is not attempting to 
address any lack of transparency surrounding arbitration agreements per 
se. The Bureau is in general concerned about consumer awareness of 
contract terms and the ability of consumers to make informed choices 
about consumer financial products and services. However, the Bureau 
does not at this time have a basis to believe that any such lack of 
transparency leads to harm for consumers in this specific context, as 
it does not have a basis to believe that individual arbitration is 
inferior to individual litigation. As discussed in Part VI, the data on 
this issue from the Study was inconclusive. Instead, the Bureau in this 
rulemaking is focused on a concern that the lack of an effective class 
mechanism inherent in arbitration agreements provides insufficient 
deterrence, which the Bureau believes leads to sub-optimal levels of 
compliance.\1122\
---------------------------------------------------------------------------

    \1122\ In addition to the comments discussed here, an industry 
trade association commenter argued that the rule was unnecessary 
because consumers could switch providers if they did not want to be 
bound by an arbitration agreement, noting that not all providers 
have arbitration agreements in most markets. Even if some consumers 
are aware of arbitration agreements and decided to switch providers, 
this still would not resolve the market failure described here, as 
providers would still be insufficiently deterred with respect to the 
consumers who do not switch.
---------------------------------------------------------------------------

    A research center commenter argued that the Bureau does not have an 
empirical basis to conclude that current levels of deterrence are sub-
optimal. An association of State regulators also stated that it was 
troubled by the fact that the Bureau had not quantified current levels 
of providers' investment in compliance in order to determine whether 
those investments are inadequate, and believed a study of that issue 
would provide a stronger foundation for rulemaking. A debt collection 
industry trade association asserted that its members already have 
substantial incentives to comply with the law, in part because there is 
uncertainty as to whether they can rely upon creditors' arbitration 
agreements.
    The Bureau acknowledged in the proposal and acknowledges again here 
that the existing degree of compliance is difficult to quantify, and 
the Bureau does not have data available to quantify the level of 
compliance or the current level of investments in compliance. The 
Bureau requested data on these subjects, but commenters did not provide 
additional data as to either of these. The Bureau recognizes that 
existing compliance incentives may be stronger in markets where 
providers do not contract directly with consumers and thus there may be 
uncertainty as to whether providers can rely on a given creditor's 
arbitration agreements. At the same time, to the extent certain markets 
already have greater incentives to comply, the impact of the final rule 
on those markets will be correspondingly less. In any event, as noted 
above in the section 1028 findings, from its own experience and 
expertise the Bureau believes the level of compliance is generally less 
than optimal, despite the fact that providers face existing 
consequences for illegal behavior separate from class action exposure.
    The Bureau likewise acknowledges that it does not have data to 
quantify the level of investment in compliance across the 50,000 firms 
affected by this rule. As discussed further below, the Bureau's 
experience indicates that quantifying compliance costs is challenging 
for any individual firm as these costs tend to be diffused across 
multiple parts of financial institutions and are also hard to 
distinguish from costs that are incurred to enhance customer service, 
mitigate reputational risks, and related activities. The Bureau does 
not believe it is feasible to quantify these costs across all of the 
affected firms. The Study showed 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.\1123\ 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.\1124\ Class actions 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.\1125\ Individual consumer

[[Page 33393]]

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.
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    \1123\ As discussed further below, if class litigation is 
generally meritless then it does not provide an incentive for 
providers to comply with the law.
    \1124\ See generally Study, supra note 3, 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'' at 785-92 (Wolters Kluwer L. & Bus. 2011). 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.''
    \1125\ See Study, supra note 3, 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. An industry 
commenter cited a study that found more individual litigation per 
year than the Bureau's Study, which was focused on specific markets. 
For more discussion of this study and how it relates to the Bureau's 
Study, see Part VI above. The Bureau notes that even if the volume 
of cases cited by the commenter is more reflective of the overall 
level of individual litigation involving providers covered by the 
final rule, it is still several orders of magnitude less than the 
number of consumers who are members of a putative class each year.
---------------------------------------------------------------------------

    The relative efficacy of class litigation--as compared to 
individual dispute resolution, either in courts or before 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 credit 
card holders.\1126\ In economic terms, these legal claims have negative 
expected value (i.e., the costs of pursuing a remedy do not justify the 
potential rewards). The Bureau refers to such legal claims as 
``negative value claims'' below. When thousands or millions of 
consumers may have individual negative-value claims, class actions can 
provide a vehicle to combine these negative-value claims into a single 
lawsuit worth bringing.\1127\
---------------------------------------------------------------------------

    \1126\ See generally Study, supra note 3, 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 initiate legal 
proceedings, without mentioning an attorney. Id. section 3 at 18.
    \1127\ See, e.g., Posner, supra note 1124, at 785-92. See also 
Louis Kaplow & Steven Shavell, ``Fairness versus Welfare,'' 114 
Harv. L. Rev. 961, 1185 n.531 (2001) (``[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).'').
---------------------------------------------------------------------------

    An automotive dealer industry commenter argued that the market 
failure described here does not apply to large-value transactions, such 
as motor vehicle sales, because the amount of alleged injury in such 
markets is large enough that consumers' claims will not be negative-
value. It is true that individual claims are less likely to have a 
negative expected value in arbitration if the consumer harm is larger. 
However, in the Bureau's experience, small dollar claims can arise even 
for larger-balance loans, and in other markets, such as deposits, the 
balance in the account is not necessarily correlated with the amount of 
harm. For example, misconduct involving miscellaneous fees on a loan or 
deposit account may create a large number of negative-value claims, 
regardless of the size of the underlying account balance. Commenters 
did not provide support for the claim that disputes concerning 
automobile finance transactions are for significantly higher dollar 
amounts than other credit products. In any event, even a claim valued 
at several thousand dollars may not be positive-value, depending on the 
costs in time and legal fees of bringing an action and the probability 
of success.\1128\ Moreover, even with a larger claim, consumers may 
still be unaware that they have a claim at all.
---------------------------------------------------------------------------

    \1128\ In the specific context of automobile sales, the Bureau 
notes the recent Volkswagen Clean Diesel case, where despite wide 
publicity and very large individual injury caused by Volkswagen's 
conduct, only a few hundred of the more than 500,000 affected 
consumers filed individual claims. See In re: Volkswagen ``Clean 
Diesel'', No. 15-2672.
---------------------------------------------------------------------------

    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 
showed, many consumers might consider switching to a competitor if the 
consumer is not satisfied with a particular provider's 
performance.\1129\ Partly, in response to this and to other 
reputational incentives (including publicly accessible complaint 
databases), many providers have developed and administer internal and 
informal dispute resolution mechanisms.\1130\ 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.
---------------------------------------------------------------------------

    \1129\ The survey in the Study focused specifically on the 
credit card market. See Study, supra note 3, section 3 at 18. The 
survey findings might not be generalizable to any market where 
consumers face a significantly higher cost of switching providers.
    \1130\ The Bureau notes that an incentive to act to preserve a 
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.\1131\ 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.
---------------------------------------------------------------------------

    \1131\ 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 1124, at 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 Pol. 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).
---------------------------------------------------------------------------

    More specifically, reputational 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.\1132\ Thus, there is an incentive for firms to underinvest 
in compliance if 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.\1133\ The Bureau discusses the limitations 
of reputation effects more fully in Part VI above.
---------------------------------------------------------------------------

    \1132\ 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.
    \1133\ See Shapiro, supra note 1131. 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

[[Page 33394]]

under the law, the provider has an 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 
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 consumers that are not 
profitable but whose claims have a legal basis. A research center 
commenter agreed that firms do this, but argued that this is rational 
for them to do so. As discussed above in Part VI, this is precisely the 
market failure the rule is intended to address--that it is not always 
in the providers' private interest to avoid harming consumers without 
external enforcement of some kind. By reducing the collective action 
problem inherent in small claims, class actions provide a source of 
external enforcement that is currently missing for providers using 
arbitration agreements.
    Public enforcement could theoretically bring some of the same cases 
that would not be brought by private enforcement absent the 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).\1134\ In addition, other factors 
may be at play; public prosecutors could be more cautious or have 
other, non-consumer finance priorities. For all these reasons, public 
enforcement cannot and will not entirely fill the void left by a lack 
of private enforcement. The Study's analysis was consistent with this 
prediction, indicating that there is limited overlap between the two 
types of enforcement.\1135\
---------------------------------------------------------------------------

    \1134\ See Part VI.
    \1135\ See generally Study, supra note 3, section 9.
---------------------------------------------------------------------------

    An industry commenter argued that individual arbitration itself can 
solve the market failure by strengthening incentives to resolve 
disputes informally before providers have to pay arbitration filing 
fees. The commenter noted that such agreements generally contain fee-
shifting provisions that require providers to pay consumers' upfront 
filing fees, and that this gives providers an incentive to provide an 
informal resolution to claims below the value of the filing fee. The 
Bureau notes that such incentives would only be relevant if consumers 
have an incentive to file arbitration claims in the first place. The 
commenter did not assert that consumers would have such 
incentives,\1136\ but theoretically it is possible that the ease and 
low upfront cost of arbitration may change some negative-value 
individual legal claims into positive-value arbitrations, which in turn 
create an additional incentive for providers to resolve matters 
internally.\1137\ In principle, if arbitration agreements had the 
effect of transforming enough negative-value claims into positive ones, 
that would affect not just providers' incentives to resolve individual 
cases but also their incentives to comply with the law ex ante.
---------------------------------------------------------------------------

    \1136\ A research center commenter made a related argument that 
some providers have clauses in their arbitration agreements that 
provide a bonus payment to consumers who receive a favorable 
arbitration judgment in excess of the provider's last settlement 
offer. The commenter argued that such payments could increase 
consumer's incentives to file arbitration claims. However, the 
commenter acknowledged that these clauses are not commonly in use in 
consumer finance. In addition, as the Bureau discusses further below 
in Section G of this 1022(b)(2) Analysis, such clauses are unlikely 
to materially affect consumers decisions, as the ex ante expected 
value of the bonus payments is significantly lower than the face 
value.
    \1137\ 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,\1138\ 
and the Bureau is unaware that providers have routinely concluded that 
considerably more consumers were likely to file absent taking action to 
resolve informal complaints. Neither did any commenter provide 
empirical evidence supporting this claimed linkage.
---------------------------------------------------------------------------

    \1138\ See generally Study, supra note 3, 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. As discussed in more detail in Part VI, 
above, consumers weigh several other costs besides filing fees 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. Accordingly, the 
Bureau is not convinced that the difference in upfront filing fees 
makes a substantial difference to consumers' overall evaluation. As 
discussed above, consumers' incentive to pursue an individual claim 
depends upon the expected value of the claim--the net payoff from 
success or failure adjusted for the probability of success or failure 
respectively--not just the payoff from a successful claim.
    Some industry trade association commenters expressed doubt that 
class actions would resolve any market failure of the type described 
here, due to the small average payments to consumers. In the view of 
these commenters, consumers will not have sufficient incentive to file 
claims in class actions because of the small average monetary recovery 
involved for class members. As discussed in more detail in the section 
1028(b) findings, a significant portion of cases resulting in 
settlements lead to automatic distributions.\1139\ Moreover, whether 
automatic or claims-made, class settlements also lead to costs for 
companies, including defense costs and plaintiff's attorney fees, which 
magnify the deterrent effect.
---------------------------------------------------------------------------

    \1139\ See also Study, supra note 3, section 8 at 23-29.
---------------------------------------------------------------------------

    One industry association also pointed to low claims rates in 
claims-made

[[Page 33395]]

settlements, and a low proportion of filed class actions that result in 
class settlements, as a basis for concern that the rule will not 
address the market failure. The Bureau has not stated, and does not 
believe, that cases filed as class actions but which are not resolved 
in class settlements would address the market failure. The Bureau 
believes that the market failure is addressed by the availability of 
classwide relief through the class mechanism, which, as the Study 
showed, does produce outcomes providing substantial aggregate relief 
for consumers. In addition, the Bureau notes that the amount of 
monetary relief and other relief paid in these cases acts as a 
deterrent, even if some of these class settlements are structured on a 
claims-made basis with relatively lower percentage of potential class 
members filing claims. Further, a provider also cannot generally know, 
ex ante, whether the class exposure it may face would result in an 
automatic or claims-made settlement (nor how many claims will be 
submitted). Thus, the prospect of the latter may still serve as a 
deterrent in many situations.
    In general, if the extant laws were adopted to solve some 
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 that lowers providers' 
incentive to follow these laws, in this case arbitration agreements, 
that can be invoked in class litigation, would be a market failure 
since it would allow the underlying market failures to persist or 
reappear. The providers, and the market in general, would be unable to 
resolve this market failure for the same reasons that the providers 
would not be able to solve the underlying market failures in the first 
place.\1140\
---------------------------------------------------------------------------

    \1140\ 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 Final Rule
    The final rule requires 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 final rule and prohibits 
providers from invoking such an agreement in a case filed as a class 
action with respect to those consumer financial products and services. 
The final rule also prohibits third-party providers facing class 
litigation from relying on such arbitration agreements. Finally, the 
final rule requires that providers using pre-dispute arbitration 
agreements redact and submit certain records relating to arbitral 
proceedings to the Bureau.
    The Bureau believes that the final class rule will have three main 
effects on providers with arbitration agreements: (1) They will have 
increased incentives to comply with the law in order to avoid exposure 
to class litigation; (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 
will ultimately result in additional litigation expenses and 
potentially additional class settlements; and (3) they will 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 of the final class rule as, respectively, the deterrent effect, 
the additional litigation effect, and the administrative change effect. 
In addition, the final monitoring rule may have some effect on 
compliance through reputational effects, as is discussed in greater 
detail in Part VI, above.
    In this Section 1022(b)(2) Analysis, the Bureau has elected not to 
discuss further any benefits from certain abstract considerations which 
the Bureau considers above in Part VI, such as promoting the rule of 
law. To the extent that individuals value any such impacts to society 
from the final rule, this would be a part of the benefits of the rule 
to consumers; however, the Bureau is not in a position to quantify 
these impacts for purposes of this Section 1022(b)(2) Analysis. The 
Bureau did not receive any comments disagreeing with this approach. 
Accordingly, while as discussed in Part VI above, the Bureau believes 
that the final rule is in the public interest due, in part, to 
reinforcing the rule of law, the discussion in this section focuses in 
particular on more concrete impacts on individual consumers and 
providers for purposes of this Section 1022(b)(2) Analysis.
The Deterrent 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 always brought randomly 
without regard to the merits of the individual case, such that higher 
levels of compliance will result in fewer class action lawsuits), 
providers would want to ensure more compliance than if there were no 
threat of class litigation.\1141\ As discussed in more detail in Part 
VI above, even if some class actions were random and without merit, as 
long as meritorious class claims can be asserted, the threat of those 
class actions will deter conduct that would give rise to such claims. 
Leaving aside whether the filing of class actions is random, class 
action exposure would still incentivize providers to ensure appropriate 
levels of compliance if the probability of a suit's dismissal, or the 
finding of merit, is affected by the level of compliance. Given the 
Bureau's assumptions outlined above, economic theory suggests that 
providers who are immune from class litigation currently under-comply 
from an economic welfare perspective, and therefore this

[[Page 33396]]

additional deterrence is beneficial.\1142\ For this purpose, both the 
cost of class relief and the cost of related litigation are counted as 
contributing to the size of the strengthened compliance 
incentives.\1143\
---------------------------------------------------------------------------

    \1141\ See, e.g., Kaplow & Shavell, supra note 1127, 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.'').
    \1142\ See Gary Becker, ``Crime and Punishment: An Economic 
Approach,'' 76 J. Pol. Econ. 169 (1968). See also Shapiro, supra 
note 1131; Posner, supra note 1124. See the 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.
    \1143\ See Kaplow & Shavell, supra note 1127.
---------------------------------------------------------------------------

    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.
    An industry commenter asserted that most class action claims are 
frivolous and that this reduces the potential deterrent effect of the 
rule because if claims are frivolous, no amount of increased compliance 
could eliminate the risk that a provider would be sued. Many consumer 
advocate and consumer law firm commenters took the opposite position, 
arguing that class actions serve to redress real consumer injury from 
illegal conduct. The Bureau acknowledges that some class actions filed 
may be frivolous in nature, but believes this would only be true in 
general if providers were always in full compliance with the law. This 
is because the ability of class actions to recover for consumers, and 
reward class action attorneys, bears a relationship to the merits of 
the cases. Defendants are more likely to procure the dismissal of 
frivolous claims, and less likely to settle such claims, than 
meritorious claims. Further, even where frivolous claims are settled, 
the settlements are likely to be smaller than for meritorious claims. 
For these reasons and those discussed in Part VI above, a meritorious 
case is more likely to be pursued than a frivolous one. The fact that 
class actions can be filed (and are more likely to be filed) for 
meritorious claims therefore creates a disincentive to break the law.
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 those consumers. However, this benefit to consumers is also 
a cost to providers.\1144\ This payment from the provider to consumers 
in and of itself is, in economic terms, a transfer,\1145\ 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, which the Bureau discuses in 
the below) economically inefficient.\1146\ These transaction 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 will vary 
depending upon how and when in the process a case is resolved.\1147\ 
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. The Bureau notes 
that, as in many cases of economic policy, there may be a trade-off 
between efficiency and equity, that is, between total output and the 
distribution of that output. A policy of allowing wrongdoers to keep 
ill-gotten gains might be efficient in that it avoids costly transfers, 
but might also lead to a distribution of resources that is inequitable. 
Although the Bureau's 1022(b)(2) analysis here, in cataloguing the 
costs and benefits of the rule, abstracts from equity concerns, as a 
general matter a policy of allowing transfers to compensate injured 
parties might be justified on equity grounds despite being inefficient 
absent a deterrent effect or other benefits.
---------------------------------------------------------------------------

    \1144\ 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.
    \1145\ ``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.'' 
Memorandum to the Heads of Exec. Agencies & Establishments from Off. 
of Mgmt. & Budget, at 38 (Sept. 17, 2003), 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 Legal Studies 1153, at 1155 (``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.'').
    \1146\ As noted above, these other costs still contribute to the 
deterrence incentive.
    \1147\ 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 
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.\1148\ The same can be true in

[[Page 33397]]

principle for in-kind relief, although the Bureau believes that the 
benefits to consumers of such relief are more limited. Thus in some 
cases involving substantial injunctive relief, litigation could be 
viewed as efficient from the perspective of economic theory independent 
of any deterrent effect.
---------------------------------------------------------------------------

    \1148\ 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 final class rule will 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 will require providers to incur 
expenses to change their contracts going forward, and amend contracts 
they acquire or provide a notice.\1149\ The Bureau acknowledges that, 
as some industry commenters noted, some providers have a substantial 
number of distinct agreements, all of which would need to be modified 
to comply with the rule.
---------------------------------------------------------------------------

    \1149\ As discussed further below, providers like debt buyers or 
indirect automobile lenders will need to provide notices to 
consumers upon purchase of consumer debt with an arbitration 
agreement that adheres to the proposal's mandated provision.
---------------------------------------------------------------------------

Effects of the Requirement To Submit Arbitral and Court Records
    The final rule will also require that providers using pre-dispute 
arbitration agreements submit certain records relating to arbitral and 
certain court proceedings to the Bureau. This will require providers to 
incur additional expenses when such an agreement is invoked, with some 
one-time expense of establishing a procedure for accomplishing such a 
task and some recurring expense for each incidence.

B. Potential Benefits and Costs to Covered Persons

Overview
    Given that providers using arbitration agreements have chosen to do 
so and will be limited in their ability to continue doing so by the 
final rule, these providers are unlikely to experience many notable 
benefits from the Bureau's final rule.\1150\ Rather, the benefits of 
the final rule will flow largely to consumers, as discussed in detail 
in the next part of this section.
---------------------------------------------------------------------------

    \1150\ The Bureau believes that it is possible that some 
providers without arbitration agreements will benefit from the final 
rule. Their rivals' costs will increase, and thus providers without 
arbitration agreements will benefit to the extent that cost increase 
is passed through to consumers (or to the extent rivals change their 
aggressive practices). See Salop and Scheffman, ``Raising Rivals' 
Costs,'' 73 Am. 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 will 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.
---------------------------------------------------------------------------

    Providers' costs correspond directly to the three aforementioned 
effects of the final class rule and to the fourth effect, which arises 
from the final monitoring rule: (1) Providers will experience costs to 
the extent they act on additional incentives for ensuring more 
compliance with the law; (2) providers will spend more to the extent 
that the exposure to additional class litigation actually materializes; 
(3) providers will incur a one-time administrative change cost or 
ongoing amendment or notices costs; and (4) providers will incur 
ongoing administrative costs from the requirement to submit arbitral 
and certain court records to the Bureau. The Bureau considers each of 
these effects in turn. To the extent providers pass these costs through 
to consumers, providers' costs will 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 final rule prohibits 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 ways. All of these 
ways of lowering class litigation exposure will 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 
competitors, as well as actions by regulators. Providers will 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 data on compliance 
costs.\1151\ 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 would be 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, or reasonably 
available to it, the Bureau is unable to quantify these costs. The 
Bureau requested comment and data on this subject, but no commenters 
provided relevant data (as opposed to data on overall cost and impact 
of compliance generally, which one credit union industry commenter 
estimated).
---------------------------------------------------------------------------

    \1151\ 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.).
---------------------------------------------------------------------------

    An association of State regulators expressed concern that the 
compliance costs of the proposal could be substantial, and that 
requiring institutions to incur those costs could pose safety and 
soundness concerns for the depository institutions that the 
association's members supervise. The commenter urged the Bureau to 
engage in a more rigorous analysis of current and future compliance 
costs before

[[Page 33398]]

finalizing the rule. The Bureau notes that arbitration agreements are 
not universal, such that for the markets covered by the final rule and 
that are subject to the authority of State regulators, there are 
depository institutions that do not currently employ such agreements. 
Indeed, as discussed below, the Bureau estimates that the majority of 
depository institutions do not use arbitration agreements. It is 
evident that depository institutions without arbitration agreements are 
able to remain safe and sound despite their exposure to class action 
liability. The Bureau has no reason to believe that depository 
institutions with arbitration agreements are less financially sound 
than those without or that requiring certain depository institutions to 
amend their agreements will cause them to become less financially 
sound. For the reasons above the Bureau believes that increasing class 
action exposure for depository institutions currently using arbitration 
agreements will not pose safety and soundness risks. In addition, as 
discussed in Part III, no class action in the Study went to trial. As 
further discussed in the findings in Part VI, courts are generally able 
to consider the financial condition of the defendant when evaluating 
the reasonableness of class settlements and litigated judgments. In 
addition, under CAFA, prudential regulators are afforded notice and the 
opportunity to comment on the proposed class settlement before the 
court makes a final approval decision. These mechanisms allow for 
consideration of safety and soundness concerns into the class 
settlement approval process.
    A credit union industry commenter disagreed with the Bureau's 
analysis of the costs of additional compliance. In the view of this 
commenter, the costs to credit unions of complying with existing laws 
and regulations are excessive, and the increase in class action 
liability for those that now employ arbitration agreements would make 
these costs worse for credit unions. However, as the commenter noted 
and as the Study showed, most credit unions currently do not use pre-
dispute arbitration agreements. The class provision will not impose 
costs on entities that do not currently use arbitration 
agreements.\1152\ With respect to those credit unions that do use 
arbitration agreements, the Bureau does not believe the impact of the 
rule will be significantly different for them than any other provider 
whose products have a similar level of compliance with applicable laws.
---------------------------------------------------------------------------

    \1152\ Credit union industry commenters also argued that their 
member-owned structure creates incentives to be more consumer-
friendly than other financial institutions. The commenters did not 
generally dispute the Bureau's view that credit unions generally do 
not use arbitration agreements for most products and services. 
However, credit union industry commenters also asserted that the 
rule would impose costs on their members because even though they do 
not currently use arbitration agreements, they are currently 
considering doing so. As noted above, any such cost is likely 
minimal--if the option of adding an arbitration agreement had 
substantial value for credit unions, presumably more credit unions 
would have already adopted them.
---------------------------------------------------------------------------

    As noted, the Bureau believes that, as a general matter, the final 
rule will increase at least some providers' incentives to invest in 
additional compliance. The Bureau believes that the additional 
investment will be significant, but cannot predict precisely what 
proportion of firms in particular markets will 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 invests in compliance will 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 and the 
ability of the provider to mitigate the legal risk. 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 extreme 
case, 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 deterrent effect is 
going to be absent. However, as discussed above, if success in a class 
action is related to the merit of the claim, there will be an incentive 
on the part of attorneys to bring claims with merit and therefore an 
incentive on the part of providers to invest in compliance. Indeed, 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.\1153\ 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.
---------------------------------------------------------------------------

    \1153\ This is hard to measure empirically and the Bureau 
requested comments on or submissions of any empirical studies that 
have measured the merit of class actions involving consumer 
financial products or services. The Bureau did not receive any 
comments relevant to this question. 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 may take a 
variety of specific actions with different cost implications. First, 
providers may spend more on general compliance management. For example, 
upon the effective date of the rule, a provider may 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 may 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.\1154\ Moreover, there may 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.
---------------------------------------------------------------------------

    \1154\ The providers that already have a compliance management 
system with an audit function could, for example, increase the 
frequency and the breadth of audits.
---------------------------------------------------------------------------

    In addition, providers may incur costs due to changes in the 
consumer

[[Page 33399]]

financial products or services themselves. For example, a provider may 
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 may 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 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 may 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 FDCPA, 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.\1155\ 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, 
among other reasons discussed more fully in Part VI, 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.
---------------------------------------------------------------------------

    \1155\ 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.\1156\ 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.
---------------------------------------------------------------------------

    \1156\ The law requires that a bank 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.\1157\ 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 he or she is not able to access 
credit. However, a creditor could invest in improving its notice 
procedures and content.
---------------------------------------------------------------------------

    \1157\ A creditor would have to send such a notice. See 15 
U.S.C. 1681m(a).
---------------------------------------------------------------------------

Providers' Costs Due to Additional Class Litigation: Methodology and 
Description of Assumptions Behind Numerical Estimates
    Additional investments in compliance are unlikely to eliminate 
additional class litigation completely, at least for some 
providers.\1158\ Thus, those providers that are sued in a class action 
will 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.
---------------------------------------------------------------------------

    \1158\ 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 proposal, the Bureau developed preliminary estimates using the data 
underlying the Study's analysis of Federal class settlements over five 
years (2008 to 2012), 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 the proposal.\1159\ After 
considering the comments discussed below, the Bureau is finalizing the 
estimates from the proposal, which it discusses again here.
---------------------------------------------------------------------------

    \1159\ See generally Study, supra note 3, 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 to 20 percent]; (2) 
some providers but fewer than half use arbitration agreements [20 
percent to 50 percent]; (3) more than half but not the vast majority 
use arbitration agreements [50 percent to 80 percent]; and (4) the 
vast majority use arbitration agreements [80 percent to 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 to 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) will 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.
---------------------------------------------------------------------------

    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. 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.\1160\ 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 
proposal going forward in each market if the providers who currently

[[Page 33400]]

have arbitration agreements were no longer insulated from class 
actions.
---------------------------------------------------------------------------

    \1160\ See U.S. Census Bureau, ``North American Industry 
Classification System,'' http://www.census.gov/eos/www/naics/ (last 
visited June 1, 2017).
---------------------------------------------------------------------------

    The Bureau's estimate 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 
proposal, which was somewhat narrower.\1161\ Specifically 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. Due to the narrower scope of both the proposal and the final rule, 
the Bureau's Section 1022(b)(2) Analysis focuses only on the impact on 
covered entities when they offer products and services subject to the 
rule, rather than the broader scope of the research of Federal class 
actions in the Study. Additionally, the class rule will 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.\1162\ The set of Federal class 
settlements the Bureau used to estimate the impacts of the rule 
therefore excludes 117 Federal class settlements analyzed in Section 8 
of the Study.\1163\ In addition, to avoid underestimating the effects, 
the estimates in this section also include 10 additional class 
settlements identified through the Section 8 search methodology which 
are within the scope of the final rule by it but which had not been 
counted in the data analyzed in Section 8.
---------------------------------------------------------------------------

    \1161\ 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 3, 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. The Bureau notes that although the scope of the final rule 
differs slightly from that of the proposal, the changes in scope did 
not affect the estimates presented here.
    \1162\ Persons offering or providing similar products or 
services might be covered by the final rule in some circumstances; 
the Bureau's estimates are not a legal determination of coverage.
    \1163\ 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 
proposal on Federal class litigation, as well as the 117 excluded cases 
described above, were listed in the proposal. 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 419 cases 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.\1164\
---------------------------------------------------------------------------

    \1164\ 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.
---------------------------------------------------------------------------

    Many of the cases not used to estimate the impact of the rule in 
the Bureau's Section 1022(b)(2) Analysis were EFTA ATM ``sticker'' 
cases, in which noncustomers had sued ATM operators for failing to 
comply with the historical requirement in EFTA to post a ``sticker'' on 
the ATM disclosing certain information concerning ATM fees. A research 
center commenter argued that a consistent approach would have been to 
also exclude FDCPA claims against debt collectors, which the Bureau did 
not exclude. In the commenter's view, both types of cases are not 
subject to arbitration, and the commenter believes that including FDCPA 
cases and excluding EFTA ATM sticker cases biases the Bureau's 
estimates in favor of the rule. The Bureau disagrees with this comment. 
The Bureau believes that it is not appropriate to include EFTA ATM 
sticker cases in its analysis because those cases concerned rights of 
persons using an ATM machine who were not holders of an account at the 
institution offering the ATM (and which in some cases may have been a 
merchant). A financial institution providing ATM services to 
noncustomers is not a product or service covered by the rule. The 
commenter's analogy between that service and debt collection is not 
apposite because debt collection is specifically covered by the 
rule.\1165\ See 1040.3(a)(10). Furthermore, regarding FDCPA cases, as 
noted above in its section 1028 findings, and as a number of SERs 
stated in the SBREFA Panel process \1166\ and debt collection industry 
comments confirmed, the Bureau believes that debt collectors who are 
subject to class action lawsuits often do rely on arbitration 
provisions included in contracts between the original creditor and 
consumers, which specifically provide for the debt collector to be a 
beneficiary of the arbitration agreement. In contrast, the Bureau is 
not aware of any cases in which an arbitration clause has been invoked 
to try to block an ATM sticker case.\1167\
---------------------------------------------------------------------------

    \1165\ 81 FR 32830, 32929-30 (May 24, 2016).
    \1166\ SBREFA Report, supra note 419, at 21 and appendix A (debt 
collection industry letters).
    \1167\ Specifically, the Bureau is not aware of any deposit 
agreement whose arbitration agreement makes a foreign ATM operator a 
beneficiary. Nor has the Bureau seen an example of a financial 
institution seeking to rely on an arbitration agreement to block an 
EFTA ATM ``sticker'' class action.
---------------------------------------------------------------------------

    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 will 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 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 final rule 
will affect, the estimates of costs to providers and the benefits to 
consumers going forward will be overestimates.

[[Page 33401]]

    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 two class settlements per year (10/5).\1168\ The 
Bureau performs similar calculations for the monetary exposure in terms 
of payments to class members and plaintiff's attorney fees.
---------------------------------------------------------------------------

    \1168\ 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 Report, supra note 
419, 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 3, 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 reported 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).\1169\ The Bureau 
documented about $2 billion in gross cash relief and about $1.09 
billion in payments.\1170\ 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 was 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 and 
final rule results in the aggregate payment amount changing from $1.09 
billion to $1.07 billion.\1171\
---------------------------------------------------------------------------

    \1169\ See Study, supra note 3, section 8 at 3-5 and 23-29.
    \1170\ 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 Id. section 8 at 12, 16, 24, 27.
    \1171\ 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 Study documented relief provided to consumers and attorney's 
fees paid to attorneys for the consumers,\1172\ but the Study did 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 fees 
with appropriate adjustments.\1173\ 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 salaried basis, and face considerably lower risk. As discussed at 
greater length in Part VI, 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.\1174\ 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 fees.
---------------------------------------------------------------------------

    \1172\ These fees included other litigation costs such as expert 
report costs as well as amounts paid for settlement administrator 
costs. See Study, supra note 3, appendix B at 137.
    \1173\ A research center commenter asserted that the Bureau's 
calculation in the proposal did not account for the costs of 
discovery and staff time on the part of the provider. The commenter 
did not provide data on these costs and the Bureau believes that 
discovery in class actions prior to certification may be limited. In 
any event the Bureau disagrees that the proposal did not account for 
any such costs--discovery costs in particular will be borne by 
plaintiffs' attorneys as well and reflected in the plaintiff's 
attorney fees that the Bureau used to calculate defense costs. In 
addition, discovery costs are not necessarily greater for defendants 
than for plaintiffs, and the commenter provided no data on this 
subject. With regard to staff costs, the Bureau believes these costs 
are often fixed costs and is not aware of evidence indicating that 
companies add staff to defend class actions.
    \1174\ 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's 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 Empirical Legal Studies 
27 (2004); Fitzpatrick, supra note 709.
---------------------------------------------------------------------------

    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.\1175\ The Bureau assumes that 
in all cases the plaintiff's attorney 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. Based on 
that assumption, and the further assumption that the defense costs were 
equal to the lodestar (prior to multiplication), the Bureau estimated 
defense costs.
---------------------------------------------------------------------------

    \1175\ Despite the small sample, this number is consistent with 
the finding by Professor Fitzpatrick of a 1.65 average. See 
Fitzpatrick, supra note 709, 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 did 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; \1176\ however, the Bureau

[[Page 33402]]

generally believes that the amounts at stake are not nearly as large in 
State courts.\1177\ 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.\1178\ For example, there might be 
considerably more putative State class actions filed against automobile 
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.
---------------------------------------------------------------------------

    \1176\ 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 3, section 6 at 16-17. Note that the Federal 
and State data in Section 6 of the Study includes size markets, and 
not all the markets that would be affected.
    \1177\ Especially due to the CAFA, 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.
    \1178\ See Study, supra note 3, section 6 at 19 tbl. 4.
---------------------------------------------------------------------------

    An industry commenter argued that some laws result in many more 
cases being pursued at the State level than the Federal level. The 
Bureau agrees that some claims involving some laws may be more commonly 
asserted in one forum or another, but disagrees that this means that 
the total number of State court class actions is likely to be higher 
than the total number of Federal class actions. In the Study, the 
Bureau sampled three States and several additional counties to examine 
the level of class action litigation in courts in those jurisdictions, 
and, extrapolating from the sample, found the State class actions were 
approximately as common as Federal class actions.\1179\ Given that the 
Bureau does not have nationwide data to estimate the number of 
additional State class actions as a result of the class provision, the 
Bureau believes that its assumption that there might be a similar 
number of Federal and State cases remains appropriate in the aggregate; 
commenters provided no data to the contrary.
---------------------------------------------------------------------------

    \1179\ See id. section 6 at 15.
---------------------------------------------------------------------------

    The same industry commenter also asserted that State class actions 
can have more variable litigation costs than Federal class actions. The 
commenter argued that State courts lacked controls, expertise, and 
oversight to create consistent outcomes, and this may lead to 
unpredictable costs. The commenter did not cite data on this point. 
Congress adopted CAFA to address many of the concerns raised by the 
commenter. To assess whether CAFA was sufficient to address these 
concerns, the Bureau would need data post-dating the adoption of CAFA, 
as CAFA limited the cases that could be maintained in State court. The 
Bureau is not aware of any data that post-dates the adoption of CAFA. 
Further, even if costs are more variable, this does not mean that on 
average they are higher.\1180\
---------------------------------------------------------------------------

    \1180\ In addition, the Study (Section 6 at 36 tbl. 3) showed 
that those cases that were brought in and remained in State courts 
(which are the basis for the Bureau's estimate of State court 
defense costs, since the removed cases are treated as Federal 
cases), were more likely to include State law claims and no 
significant Federal claims. The State court judiciary may have even 
greater expertise on State law than the Federal judiciary. In any 
event, as the Study (Section 6 at 45 fig. 14) indicated, State class 
actions took slightly longer to resolve than non-MDL class actions 
in Federal court, but considerably less time than MDL class actions 
in Federal court.
---------------------------------------------------------------------------

    A State regulator commenter argued that State court class actions 
are more costly to litigate than Federal class actions of similar size. 
The commenter asserted that differences in State laws regarding the 
procedure used for class actions could increase the length and 
complexity of the process to certify a class action under a particular 
State's laws. The commenter provided no evidence to support this 
assertion. Moreover, this would only be relevant in cases where the 
parties are litigating the issue of certification. The commenter also 
provided no reason to believe that costs would be higher if the matter 
is resolved in any of a number of other ways, including a class 
settlement, a non-class settlement, or litigating a dispositive motion. 
In light of the requirements of CAFA, which generally limit the amount 
of relief available in multi-state class action claims in State courts 
to $5 million, the Bureau believes that State court class actions may 
be more expensive relative to the size of the injury involved, but 
mainly because there are fixed costs involved in litigating a class 
action, and State court class actions are likely less complex and 
involve fewer consumers.\1181\ It is likely that Federal cases of 
similar size are similarly costly to litigate. This is supported by 
data publicly reported in the Federal Judicial Center survey of defense 
counsel finding that cost was not a common factor in the decision to 
remove a case from State court to Federal court.\1182\
---------------------------------------------------------------------------

    \1181\ The Bureau discusses the issue of fixed costs in class 
action litigation more fully in Part VI, above.
    \1182\ Thomas E. Willging & Shannon R. Wheatman, ``An Empirical 
Examination of Attorneys' Choice of Forum in Class Action 
Litigation,'' Federal Judicial Center, at 21 tbl. 3 (2005), 
available at http://www.uscourts.gov/file/clact05pdf.
---------------------------------------------------------------------------

    A research center commenter made several criticisms of the 
methodology described above, all relating to the ratio of attorney's 
fees to consumer recovery in class actions. First, the commenter argued 
that the Bureau's approach for calculating the average ratio of 
attorney's fees to consumer payments is flawed because it overweights 
the impact of certain large settlements involving litigation over 
depositories' overdraft programs. Second, the commenter questioned the 
results of the Bureau's aggregate calculation, pointing to a study by 
one of the comment's authors that found much higher ratios. Finally, 
the commenter argued the Bureau's decision to include FDCPA cases in 
its analysis but not EFTA ATM sticker cases, discussed above, biases 
its calculations.
    The Bureau disagrees with the commenter's specific critiques,\1183\ 
but more broadly the Bureau believes that the commenter's focus on the 
ratio of attorney's fees to consumer payments is misplaced. The 
relative split of costs between consumers and their attorneys is not 
relevant to evaluating the overall burden of new class actions on 
providers, who must pay all costs.\1184\

[[Page 33403]]

Even considering the effectiveness of the class action procedure for 
providing monetary redress to consumers, which as discussed above is a 
transfer in economic terms with no direct effect on welfare, the ratio 
of attorney's fees to consumer payments may be misleading.\1185\ Under 
some Federal consumer protection laws, the maximum recovery for the 
class is capped. In other cases, plaintiff's attorney fees are not 
negotiated or awarded by a court until after a consumer settlement 
amount has been reached. And in cases with injunctive relief, the court 
takes into account that relief when considering the reasonableness of 
attorney's fees, even if the value of that relief cannot be quantified.
---------------------------------------------------------------------------

    \1183\ Regarding the use of an aggregate average the Bureau 
disagrees that the aggregate average is an inappropriate metric. In 
the context of class action litigation, where different cases may 
have wildly different numbers of consumers involved and similarly 
variable total claimed injury, taking a case-by-case average will 
produce misleading results because it weights all cases equally, 
regardless of the magnitude of the case, thus placing arbitrary 
significance on a case count instead of on counts of dollars and 
class members. The Bureau discusses this further, including the 
effect of the overdraft settlements, above in Part VI.
    Regarding the much higher ratios of attorney's fees to consumer 
payments in the study conducted by one of the authors of the comment 
compared the Bureau's estimates, the Bureau disagrees that this is 
due to problems with its analysis. The main portion of the 
discrepancy between the Bureau's analysis and that of the commenter 
is in the set of cases used for analysis. As noted above in Part VI, 
if the study cited by the commenter had used the same definition of 
relevant cases as the Bureau's impacts analysis, it would have 
obtained substantially similar results to those of the Bureau.
    Regarding the specific choice to include FDCPA cases in its 
analysis, the Bureau disagrees with the commenter that this creates 
a bias. Removing debt collectors from the Bureau's analysis would 
not make the Bureau's estimates--the ratio of class action 
attorney's fees to consumer recovery--more favorable to class 
actions. Debt collection cases make up a majority of the new class 
action lawsuits the Bureau estimates will occur as a result of the 
rule, as illustrated in Table 1. Removing them would reduce the 
count of cases by about half. Debt collection cases on average 
involve lower fees but also lower payments to consumers; however, 
the ratio of attorney's fees to consumer payments is higher for debt 
collection cases than class actions in other industries, and so the 
overall ratio of attorney's fees to consumer recovery would be 
somewhat lower if debt collectors were excluded.
    \1184\ In Part VI above, the Bureau considers whether class 
action plaintiff's attorney fees are excessive and thus against the 
public interest. The Bureau finds above that plaintiff's attorney 
fees are not generally excessive. However, the Bureau notes again 
that the primary effect of the rule, and the source of the important 
costs and benefits, is from deterrence, and thus the question of 
whether attorney's fees are excessive is not in and of itself 
relevant to the Bureau's Section 1022(b)(2) Analysis. Moreover, the 
ratio of attorney's fees to consumer redress is not even necessarily 
informative as to whether fees are excessive. Consumers could 
benefit greatly from injunctive relief while receiving little 
monetary compensation (perhaps due to capped statutory damages), 
leading to a very high ratio of fees to redress regardless of the 
reasonableness of the attorney's compensation.
    \1185\ The Bureau discusses the relative size of attorney's fees 
above in Part VI, the section 1028 findings, addressing comments 
asserting that plaintiff's attorneys are unjustly enriched by class 
action litigation. As discussed above, the Bureau finds plaintiff's 
attorneys are not in general unjustly enriched.
---------------------------------------------------------------------------

Covered Persons' Costs Due to Additional Class Litigation
    The Bureau estimates that the final class rule will create class 
action exposure for about 53,000 providers (those who fall within the 
coverage of the final rule and currently have an arbitration 
agreement).\1186\ Based on the calculation described above, the 
Bureau's model estimates that this class action exposure will 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 will be paid out to consumers, an additional $66 million 
will be paid out to plaintiff's attorneys, and an additional $39 
million will be spent by providers on their own attorney's fees and 
internal staff and management time.\1187\
---------------------------------------------------------------------------

    \1186\ See the FRFA below for the data used to arrive at this 
estimate.
    \1187\ 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 fees, 
and an additional $67 million for defendant's attorney 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.
    Many cases also feature in-kind relief.\1188\ However, as in the 
Study, the Bureau is unable to quantify this cost in a way that would 
be comparable with payments to class members. Similarly, injunctive 
relief could in some cases result in substantial forgone profit (and a 
corresponding substantial benefit to the consumers), but cannot be 
easily quantified.\1189\ Commenters generally did not dispute the 
numbers discussed above, although some industry commenters disputed 
whether it was appropriate to compare overall litigation costs to the 
number of consumer accounts involved. These industry commenters 
expressed the view that the overall costs were substantial. However, 
they did not provide an alternative point of comparison beyond the 
number of consumer accounts covered by the proposal. The Bureau still 
believes that it is relevant to compare the overall costs of additional 
class action litigation to the size of the markets covered by the 
rule.\1190\
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    \1188\ See Study, supra note 3, 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.
    \1189\ 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. Id. 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 noted in the Study, behavioral 
relief is seldom quantified in case records, and thus the Bureau 
does not quantify it. Id. section 8 at 5 n.10.
    \1190\ One industry commenter disputed the validity of this 
comparison of estimated additional costs incurred by sued firms to 
the overall universe of firms affected by the rule, arguing instead 
that the Bureau ought to compare the class action defense costs to 
only those firms that would incur these costs, and the number of 
accounts at only those firms. However, the Bureau does not believe 
it would be appropriate to ignore the probability that any one firm 
would be sued when evaluating the scale of the additional litigation 
costs.
---------------------------------------------------------------------------

    In addition to the costs of Federal class actions as discussed 
above, the Bureau assumes that providers who become subject to class 
actions as a result of the rule will 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.
    The Bureau performed a similar analysis to estimate the number of 
cases that will be filed as putative class actions but 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.\1191\ 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 was precisely because of an arbitration agreement. 
Nonetheless, on this assumption and extrapolating from the estimated 
103 additional Federal cases that will be settled on a classwide basis 
each year, the Bureau estimates that there will be 501 additional 
Federal court cases filed as class actions that will end up not 
settling on a classwide basis, assuming no change in filing behavior by 
plaintiff's attorneys.\1192\ 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.
---------------------------------------------------------------------------

    \1191\ 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. Id. section 6 at 7, 36.
    \1192\ 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

[[Page 33404]]

other way.\1193\ The Bureau discusses two potential estimates below and 
presents the more conservative one in the table below. The cost to 
providers from a putative class case that is not resolved as a class 
case is almost entirely from defense costs--the Bureau believes the 
compensation to a single consumer is likely to be trivial by 
comparison, and any plaintiff's attorney fees--if paid by the provider 
at all--will be of a similar magnitude.\1194\
---------------------------------------------------------------------------

    \1193\ See Study, supra note 3, section 6 at 46 tbl. 7.
    \1194\ One industry commenter expressed concern that the Bureau 
had significantly undercounted the costs of putative class actions 
that resulted in individual settlements. The commenter mistakenly 
interpreted the additional fees listed in the last column of Table 1 
in the Section 1022(b)(2) Analysis in the proposal as excluding 
defense costs. In fact, the figures are almost entirely defense 
costs.
---------------------------------------------------------------------------

    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) as 
much to litigate. Therefore, the Bureau estimated that these additional 
501 Federal class cases that do not settle on a class basis will 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 will 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 will likely be significantly 
cheaper for providers.\1195\
---------------------------------------------------------------------------

    \1195\ 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 Bureau also calculated the impact of making the 
opposite assumption 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 class 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.\1196\ 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.
---------------------------------------------------------------------------

    \1196\ 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 Report, supra note 419, at 18.
---------------------------------------------------------------------------

    The Bureau notes that for several markets the estimates of 
additional Federal class action settlements are low.\1197\ These low 
estimates could reflect some combination of the following three 
possibilities. First, as noted above, in some markets class actions may 
be more commonly filed in State courts. Second, 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. Finally, in some markets the current prevalence of 
arbitration agreements is so high (over 80 percent) that any estimates 
regarding future class action activity in the absence of such 
agreements are especially imprecise because currently so few firms are 
subject to class action exposure.
---------------------------------------------------------------------------

    \1197\ 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.
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BILLING CODE 4810-AM-P

[[Page 33405]]

[GRAPHIC] [TIFF OMITTED] TR19JY17.002

BILLING CODE 4810-AM-C
    The Bureau notes that providers might attempt to manage the risks 
of increased class litigation exposure by opting for more comprehensive

[[Page 33406]]

insurance coverage or a higher reimbursement limit. However, the Bureau 
is not able to model the impacts of insurance in providers' response to 
the final rule. During the Small Business Review Panel, these 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. These 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.\1198\
---------------------------------------------------------------------------

    \1198\ Related to this discussion, an insurance industry trade 
association commenter asserted that litigation insurance rates would 
be higher for providers who do not have or cannot rely on an 
arbitration agreement. The Bureau acknowledges that this is likely 
true simply as a matter of basic economic theory, but the Bureau 
cannot quantify the size of this effect, nor did the commenter 
provide any information or data indicating the magnitude of any 
potential change in insurance premiums.
---------------------------------------------------------------------------

    Regarding the total costs to providers over a five year period, 
three industry trade associations asserted that accounting for State 
class actions could as much as double the total costs to providers from 
additional class action litigation, to $5.2 billion. The commenters 
apparently were extrapolating from the Bureau's observation in the 
proposal that the incidence of additional State class litigation might 
be similar to the incidence of additional Federal class 
litigation.\1199\ The commenters essentially characterized that aspect 
of the Bureau's analysis from the proposal as bounding the cost of 
State class actions between zero and the full cost of additional 
Federal class actions.
---------------------------------------------------------------------------

    \1199\ 81 FR 32830, 32907 (May 24, 2016).
---------------------------------------------------------------------------

    The Bureau acknowledges again that the total additional litigation 
costs to providers will exceed costs from Federal class actions 
presented in Table 1, as they do not account for the costs of State 
class actions. The Bureau also acknowledges again that it does not have 
reliable data to estimate the cost of additional State class actions. 
However, as discussed above, the Bureau disagrees that the cost of 
State class actions are likely to be anywhere near the full cost of 
Federal class action litigation. Most State court class actions will 
seek smaller amounts of monetary relief than Federal court class 
actions, sometimes considerably so, due to the fact that class actions 
seeking more than $5 million in relief generally can be removed to 
Federal court under CAFA.\1200\ As already noted, the Bureau expects 
that payments to consumers from State court class actions will be 
markedly lower than in cases settled in Federal court, due to the 
limits imposed by CAFA. No commenters disputed this assertion. Given 
that the vast majority of the Bureau's estimate of the costs of 
additional litigation comes from payments to consumers, which vary by 
the size and nature of the case and are likely to be higher in Federal 
litigation, the Bureau does not believe that a cost equal to that of 
the additional Federal class actions is a reasonable upper bound for 
the cost of additional State class actions.
---------------------------------------------------------------------------

    \1200\ While claims under many Federal consumer protection 
statutes have damages caps, those claims also generally can be moved 
to Federal court if State court claims do not predominate in the 
case. See 28 U.S.C. 1331.
---------------------------------------------------------------------------

    Several industry commenters expressed the view that the Bureau 
should have generally considered costs to additional firms beyond those 
considered in the Section 1022(b)(2) Analysis in the proposal. 
Specifically, automobile dealer industry commenters expressed the view 
that the rule would have a significant impact on them because increased 
suits against indirect automobile lenders would increase the costs on 
dealers, who would be obligated to reimburse the indirect automobile 
lenders pursuant to indemnification clauses that are included in many 
contracts between dealers and indirect automobile lenders. An industry 
trade association commenter expressed a related view that merchants 
would be affected by the rule despite the exemption for merchants 
providing interest-free credit for their own nonfinancial goods or 
services because the rule would apply to servicers, collectors, and 
debt buyers (both initial and downstream). The increased costs incurred 
by those providers, in the view of the industry trade association, 
would be passed along to the merchants. As a result, the rule would 
impose costs on merchants ``indirectly,'' in the view of this 
commenter.
    In its Section 1022(b)(2) Analysis, the Bureau analyzes costs and 
benefits to covered persons whose conduct is regulated by the rule. 
Although automobile dealers and merchants who originate consumer credit 
transactions are covered persons under Dodd-Frank section 1002(6), they 
are not subject to the Bureau's rulemaking authority in circumstances 
described in sections 1027 and, in the case of automobile dealers, 
section 1029 of the Dodd-Frank Act. See Part VI for further discussion. 
As a result, their conduct is expressly not regulated by this rule. See 
generally section 1040.3(b)(6) (incorporating Dodd-Frank exemptions 
into the scope of the rule). This Section 1022(b)(2) Analysis has 
already accounted for costs of additional class actions that would 
result from the class rule, and the Bureau acknowledges here that these 
costs may be passed through to automobile dealers and merchants by the 
providers who are subject to the rule.\1201\ Based on the data 
available and information supplied by commenters, the Bureau is not 
able to estimate the amount of pass-through that would occur from these 
third parties covered by the rule to automobile dealers and merchants 
that are not covered by the rule. In any event, this impact would be 
indirect, as the industry trade association commenter noted, and thus 
is not relevant to the discussion of impacts on small entities under 
the Regulatory Flexibility Act as discussed below in Part IX.
---------------------------------------------------------------------------

    \1201\ Related to this point, two credit union industry 
commenters noted that credit unions may bear some burden of class 
actions due to conduct on the part of dealers who contract with such 
credit unions for indirect automobile lending. As noted, the Bureau 
believes that it has already accounted for any such burden through 
its estimates of new class action lawsuits in the indirect 
automobile lending market.
---------------------------------------------------------------------------

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) will 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 will 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 may be providers that perform an annual review of the

[[Page 33407]]

contracts they use with consumers. As a part of that review (provided 
it comes before the final rule becomes effective), they will 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 final rule will 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 will 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 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,\1202\ the final rule's required contractual change will 
result in a one-time cost of $19 million, or about $4 million per year 
total for all providers if amortized over five years. Alternatively, 
providers may choose to drop arbitration agreements altogether, 
potentially resulting in lower administrative costs.
---------------------------------------------------------------------------

    \1202\ See the Regulatory Flexibility Act analysis below at Part 
IX. The Bureau estimates that 4,500 debt collectors are 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.
---------------------------------------------------------------------------

    Some industry commenters asserted that their costs from the 
required administrative changes would be higher than the Bureau's 
estimates, as described above and in the proposal. A small dollar 
credit industry commenter asserted that it had more than 100 separate 
consumer agreements that would need to be updated across multiple 
systems, in addition to hardcopies at retail storefronts. A trade 
association for installment lenders argued that the addition of the 
Bureau-required contract language would require conforming changes 
throughout its members' consumer agreements. The Bureau acknowledges 
that some providers may have particular circumstances that will lead to 
above average costs, even if they do not fall into the third category 
of providers above, with highly customized contracts. The Bureau noted 
in the proposal that some providers have multiple contracts: For 
example, some credit card issuers have filed dozens of contracts with 
the Bureau.\1203\ However, given that many providers will have no or 
negligible costs, the Bureau continues to believe that its average 
estimate is appropriate.
---------------------------------------------------------------------------

    \1203\ See Bureau of Consumer Fin. Prot., ``Credit Card 
Agreement Database,'' http://www.consumerfinance.gov/credit-cards/agreements/ (last visited June 1, 2017). Presumably, the marginal 
cost of changing each additional contract is 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. Section 1040.4(a)(2)(iii) will 
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 Sec.  1040.4(a)(2) to amend the agreement to 
include that provision, or send the consumer a notice indicating that 
the acquirer will not invoke that pre-dispute arbitration agreement in 
a class action.\1204\ Various markets may incur different costs due to 
this requirement.
---------------------------------------------------------------------------

    \1204\ 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 as 
a result of additional due diligence they undertake to determine which 
acquired debts arise from consumer credit transactions (that will be 
subject to final 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 will 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 FDCPA requirements in 15 U.S.C. 1692(g), 
when applicable. The Bureau believes that these debt buyers could 
attach the additional notice that will be required by the final rule to 
this required FDCPA notice with a minimal increase in costs.
    A prepaid card industry commenter argued that the Bureau should 
have further considered the administrative burden of the proposal in 
concert with the burden imposed by the Bureau's recent Prepaid Accounts 
Rule. The commenter asserted without explanation that prepaid card 
providers would be compelled to revise their card packaging and 
disclosures twice in a short space of time. The Bureau disagrees that 
it should account for the costs of the Prepaid Accounts Rule, which 
itself accounts for its own costs.\1205\ As the Bureau explained in the 
proposal and again in this final rule, the rule does not require 
prepaid card providers to revise packaging and disclosures. 
Specifically, Sec.  1040.5(b) of the rule allows providers of general 
purpose reloadable prepaid cards to continue to sell their pre-existing 
stock as long as they give the consumer notice of the update to the 
arbitration agreement at the time they communicate with the consumer 
concerning registration of the card.
---------------------------------------------------------------------------

    \1205\ 81 FR 83934 (Nov. 22, 2016).
---------------------------------------------------------------------------

    Comments from automobile dealers asserted that the proposed class 
rule would lead to inclusion of the mandated language in form retail 
installment sale contracts and lease forms by exempt motor vehicle 
dealers. These dealers expressed concern that the Bureau's proposal did 
not allow for the use of the language that would preserve the 
arbitration agreement of the dealers because given that they typically 
sell their loans to entities that would be providers under the 
proposal, those providers will in effect mandate dealers' use of 
compliant arbitration agreements even if the Bureau does not apply its 
rule to dealers. As noted in the section-by-section analysis of the 
rule, the Bureau has updated the contract provision that can be used in 
this situation to further clarify that it does not result in the 
coverage of, or impact on, excluded persons.\1206\ While some 
automobile dealers might incur some costs in updating their contracts 
if the indirect automobile lenders they deal with do not do so 
automatically, the Bureau believes that these costs will be minimal, 
and will not be incurred by most dealers.
---------------------------------------------------------------------------

    \1206\ See Sec.  1040.4(a)(2)(iv)(B).
---------------------------------------------------------------------------

Costs to Covered Persons From the Requirements Regarding Submission of 
Arbitral and Certain Court Records
    There will also be a minor cost related to the final rule's 
requirements regarding sending records to the Bureau related to 
providers' arbitrations and certain court cases. In the Study, the

[[Page 33408]]

Bureau documented significantly fewer than 1,000 individual 
arbitrations per year in the markets analyzed.\1207\ The Bureau 
believes it is unlikely that the transmittal requirement will 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 will be required to redact specific identifiers (such as name, 
physical and email 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.\1208\ Thus, the total cost of the 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.
---------------------------------------------------------------------------

    \1207\ See generally Study, supra note 3, section 5. Relatedly, 
JAMS (the second largest provider of consumer arbitrations) reported 
about 114 consumer financial products or services arbitrations in 
2015.
    \1208\ One of the SERs on the SBREFA Panel projected two to six 
hours of staff time. See SBREFA Report, supra note 419, at 25. 
Meanwhile, one commenter suggested the burden of redacting records 
to a level that sufficiently protected consumers' privacy would be 
highly burdensome, but did not provide any quantitative estimates of 
the amount of time and staff required.
---------------------------------------------------------------------------

    With regard to the cost of submitting arbitral and certain court 
records generated by the final rule, some commenters disputed as low 
the amount estimated by the Bureau, suggesting that there would be 
additional unaccounted for burden of redacting records and ensuring 
privacy. As discussed in more detail in Part VI, however, the Bureau 
expects that the rule will not lead to additional burden because the 
Bureau provides a specific list of information types that must be 
redacted. Providers will not have to make additional redactions to 
ensure privacy in general. The Bureau, rather than providers, will bear 
any further cost of redacting information beyond those types listed in 
the rule to ensure privacy.
    In addition to the costs of submission of records listed above, one 
commenter asserted that the private nature of arbitration benefits all 
parties involved, and as such publication of arbitral records will act 
as a cost toward both parties. For firms, this takes the form of a 
reputational cost from the details of their disputes with consumers 
being made public. (The commenter's arguments regarding benefits to 
consumers are discussed separately below.) The Bureau acknowledges that 
publication of arbitral awards with rulings adverse to firms may have 
some impact on the reputation of those firms, although the Bureau notes 
that the number of arbitration cases that results in such awards is so 
small--36 per year in the markets analyzed in the Study \1209\--that 
the impact on any given firm or in the aggregate is likely to be slight 
and may be offset by reputational benefits from the publication of 
awards that favor companies. In particular, firms should only face a 
negative cost from this effect when they have arbitral claims found in 
customers' favor. Providers who comply with the law and face a claim 
without merit will experience this cost to a much lesser extent, if at 
all.
---------------------------------------------------------------------------

    \1209\ See Study, supra note 3, section 5 at 13 (reporting 32 
disputes resolved with monetary relief and 41 non-overlapping 
disputes with debt forbearance awarded, over a two-year period).
---------------------------------------------------------------------------

    Some commenters asserted that publication of arbitral records will 
provide an opportunity for plaintiffs to find companies susceptible to 
litigation, and thus indirectly impose a heavy cost burden on those 
firms. The Bureau again notes that the number of arbitral awards 
favoring individual consumers is miniscule relative to the size of the 
various markets covered by the rule. Moreover, as one commenter 
asserted, publication of arbitral records could actually create a more 
efficient private enforcement market, as consumers may be more likely 
to realize they have a valid claim if they see that an arbitral 
decision was made in favor of consumers with similar claims.
Potential Pass-Through of Costs to Consumers
    As also discussed in Part VI, the Bureau acknowledges that most 
providers will 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.\1210\
---------------------------------------------------------------------------

    \1210\ 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.\1211\ Conversely, a pass-
through rate of 0 percent would mean that consumers would not see a 
price increase or a diminution in the quality of products or services 
due to the final rule. As noted above, the monetized estimates of 
additional Federal class actions above amount to less than one dollar 
per account per year when averaged across markets, although it is 
possible that the number is higher for some markets; the monetized 
estimates of additional State class actions is even less. Also, as 
noted below in the Paperwork Reduction Act analysis, the direct cost of 
submission of arbitral and certain court records is estimated at 
approximately $500,000 per year. Given the extremely high volume of 
accounts covered under the final rule, the monetized cost of this 
provision is miniscule when averaged across 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, 
although particular markets or providers might see larger changes.
---------------------------------------------------------------------------

    \1211\ 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).
---------------------------------------------------------------------------

    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

[[Page 33409]]

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).\1212\ 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.\1213\ 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.\1214\
---------------------------------------------------------------------------

    \1212\ 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 Pol. 
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).
    \1213\ In other words, these rates depend on curvatures 
(concavity/convexity) of cost and demand functions.
    \1214\ Some industry commenters asserted that all costs of the 
class provision would be passed through to consumers, but none 
provided evidence or specific figures. Thus, the Bureau's conclusion 
remains that pass through will likely occur, but that it cannot 
estimate whether the level of pass through will be closer to zero or 
100 percent. Economic theory predicts that pass through will be 
lower in industries that are less competitive.
---------------------------------------------------------------------------

    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 final rule. The Bureau believes that providers might 
treat the administrative costs of the class rule as fixed, while the 
administrative costs for submission of arbitral and certain court 
records will primarily have a marginal component for each actual 
submission. 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.\1215\
---------------------------------------------------------------------------

    \1215\ See, e.g., RBB Economics, ``Cost Pass-Through: Theory, 
Measurement, and Potential Policy Implications,'' (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.\1216\ More 
recently, researchers have analyzed the effects of regulation that 
effectively imposed price ceilings on late payment and over-limit fees 
on credit cards and interchange fees on debit cards. These researchers, 
by and large, found evidence consistent with low to nonexistent pass-
through rates in these markets.\1217\ However, these findings do not 
necessarily imply low pass-through in other markets that will be 
affected by the final rule, as providers in different markets are 
likely to face cost and demand curves of different curvatures.
---------------------------------------------------------------------------

    \1216\ See Lawrence Ausubel, ``The Failure of Competition in the 
Credit Card Market,'' 81 Am. Econ. Rev. 50 (1991); but see Todd 
Zywicki, ``The Economics of Credit Cards,'' (Geo. Mason Sch. of L., 
Working Paper No. 00-22, 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.
    \1217\ See Sumit Agarwal et al., ``Regulating Consumer Financial 
Products: Evidence from Credit Cards,'' 130 Q. J. of Econ. 1 (2015); 
Benjamin Kay et al., ``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 et al., ``Price Controls on Payment Card 
Interchange Fees: The U.S. Experience,'' (Geo. Mason L. & Econ., 
Res. Paper No. 14-18, 2014).
---------------------------------------------------------------------------

    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.\1218\ 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 nonexistent 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).\1219\ The result also might not be representative for other 
issuers.
---------------------------------------------------------------------------

    \1218\ See generally Study, supra note 3, section 10.
    \1219\ See id. (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).
---------------------------------------------------------------------------

    Several commenters stated that the class rule would increase costs 
beyond the Bureau's estimates in the proposal's Section 1022(b)(2) 
Analysis. In general, these commenters asserted that various costs, 
including litigation discovery, costs of State court actions, and the 
costs of non-class settlements would all be passed on to consumers. As 
the commenters did not directly take issue with any of the Bureau's 
estimates of these costs, the Bureau interprets these comments as 
asserting that all such costs will be passed through. As neither the 
Bureau nor other researchers or commenters have been able to develop a 
quantitative model to estimate a specific pass-through rate in markets 
for consumer financial products and services, the commenters' view, if 
true, would not be inconsistent with the Bureau's assumption that pass-
through will be between 0 and 100 percent.
    An industry commenter asserted that the potential for pass-through 
of costs to consumers must be analyzed by focusing on individual 
companies facing class actions, not averaging across an entire market 
of consumer accounts. The commenter asserted that individual companies 
facing class actions may be forced out of business by the additional 
class action litigation exposure if they cannot pass the costs through 
to consumers and stay in business. The Bureau disagrees, as this would 
ignore the issue of pass-through of compliance costs incurred by 
providers that are not subject to such a suit. As discussed above, the 
Bureau also believes that it is important, given the size of the 
markets at issue, to evaluate cost estimates relative to the number of 
accounts and consumers. More specifically, the Bureau recognizes that 
the rule will have the greatest impact on those providers whose 
compliance is least robust, as those providers will either spend more 
to bring their compliance up to an appropriate level to avoid class 
liability or are more likely to be subject to class liability. The 
Bureau does not agree that, to the extent that the pass-

[[Page 33410]]

through of these costs occurs or that some individual providers exit 
the market, it will substantially restrict access to financial products 
or services as a whole.
    Credit union industry commenters asserted that the risk or 
magnitude of pass-through costs to consumers is effectively greater for 
credit unions, because unlike traditional banks, credit unions are 
owned by their members. The Bureau agrees that, at least for any credit 
unions that use arbitration agreements, this may be true, if somewhat 
tautological. In general, a cost to a firm must either be passed on to 
consumers through higher prices or to the owners of the firm through 
reduced profits. To the extent that credit union customers are also 
owners, such costs will ultimately fall to consumers one way or 
another. Nonetheless, given that the Bureau's preliminary conclusion 
was only that pass-through was likely greater than zero, and given that 
most credit unions currently do not use arbitration agreements and so 
will not be affected by the rule, the Bureau's analysis is not 
meaningfully altered by this comment.
    Some industry commenters argued that pass-through would be 
especially high in their specific industry. For example, a small dollar 
lending industry commenter argued that profit margins in that industry 
are so thin that costs would have to be passed on, or else firms would 
go out of business. Again, the Bureau acknowledges that full pass-
through is possible, but the Bureau believes that even full pass-
through will not impose substantial burden on individual consumers.
    A research center commenter asserted that large financial services 
firms adjust price more slowly than smaller firms and firms in other 
sectors, and that this explains the lack of price response from the 
issuers studied by the Bureau. The Bureau has no evidence to suggest 
that price responses by credit card issuers are so slow that they would 
not have been captured by the analysis in the Study, and the commenter 
did not provide any evidence to support this assertion; nor did any 
credit card issuer or other provider come forward with such evidence, 
even anecdotally.\1220\ However, the Bureau acknowledges that this is 
another reason that the lack of a price response observed in the Study 
may not reflect the industry-wide level of pass-through.
---------------------------------------------------------------------------

    \1220\ The only empirical data any commenters provided on the 
issue of arbitration agreements and pricing was an anecdote from the 
1990s where a credit card issuer offered its existing customers an 
APR discount of 2 percent if they accepted a new arbitration 
agreement. While little conclusion can be drawn from one such dated 
example, the Bureau notes that in that case, the price difference 
was not delayed.
---------------------------------------------------------------------------

C. Potential Benefits and Costs to Consumers

Potential Benefits to Consumers
    Consumers will benefit from the class rule to the extent that 
providers will 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 consumers 
experience as a result of injunctive relief in a settlement or as a 
result of changes in practices that a provider adopts in the wake of 
the settlement to avoid future litigation.\1221\ In addition, consumers 
will benefit from the monitoring rule to the extent that the rule 
provides transparency into the arbitration process.
---------------------------------------------------------------------------

    \1221\ See Part VI for a related discussion.
---------------------------------------------------------------------------

    As noted above and in Part VI, the primary effect of the rule on 
consumers will be to provide a deterrent against harmful conduct on the 
part of providers, resulting in additional investments in compliance. 
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 
institution 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 such 
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 requested comment on 
any representative data sources that could assist the Bureau in both of 
these quantifications, but did not receive any responses.
    The Bureau also believes consumers will benefit from the reporting 
requirement via improved monitoring for potential biases in 
administration of arbitration (as was alleged in the case of NAF, 
discussed in Part II above), as well as other potential harms in the 
use of arbitration agreements. Some commenters disputed this, arguing 
that the Bureau's existing database of complaints serves as a direct 
substitute. That is, in their view, the public already has access to 
consumers' complaints about providers, and more information through the 
submission of arbitral awards is unnecessary. However, the Bureau 
believes that the monitoring proposal would produce different and 
supplemental information that is important. Perhaps most importantly, 
the monitoring provision will provide the Bureau and the public insight 
into how the arbitration process is serving consumers who enter into 
it. In addition, while the Bureau's complaint process serves as an 
effective avenue through which a consumer can complain to a provider, 
the Bureau does not adjudicate claims. The Bureau does not decide on 
the merits of a complaint, and firms are not required to provide any 
response to consumer complaints submitted through the portal. Absent 
settlement by the affected entities, arbitration features legally 
binding decisions on the merits of a case by a third party that can 
serve as a means by which the public can better understand potential 
areas of non-compliance.
    Consumers will 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

[[Page 33411]]

settlements, and an unquantified amount in State court 
settlements.\1222\
---------------------------------------------------------------------------

    \1222\ 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 
will also be significant benefits to consumers when settlements include 
injunctive relief.\1223\ 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 injunctive relief from the approximately 103 additional 
Federal class settlements per year and a similar number of additional 
State class settlements.\1224\ The Bureau requested comment on whether 
the extent of this benefit, and the associated cost to providers, could 
be monetized, and if so how, but did not receive any responses.
---------------------------------------------------------------------------

    \1223\ 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 than the value to firms.
    \1224\ 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.
---------------------------------------------------------------------------

    Consumers may also benefit to the extent that they prefer to engage 
in disputes through the court system, rather than through arbitration. 
A research center's comment provided the results of its survey which 
they stated indicated that 89 percent of 1,008 consumers surveyed would 
like to be able to participate in class actions against a bank who had 
charged them for a fee or services they did not request. An industry 
association comment criticized the research center survey for, among 
other things, not asking about arbitration as an alternative, and 
several industry association comments asserted the Bureau should survey 
consumer preferences for arbitration. The latter, the Bureau believes, 
is less relevant given the infrequent use of arbitration and its 
potential to continue under the rule. Other industry commenters 
asserted that consumers prefer arbitration, although they only cited 
the purportedly attractive features of arbitration, rather than 
empirical data on actual consumer preferences. In any event, the 
research center survey concerning class actions focused on a particular 
example in a particular market, and its results may not extend to other 
situations in other markets.
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 and 
in Part VI. 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, and the Bureau believes it is unlikely that many, if 
any, providers will do so.\1225\ Assuming that some providers will 
remove these agreements, some consumers who can currently resort to 
arbitration for filing claims against providers will no longer be able 
to do so if the provider is unwilling to engage in post-dispute 
arbitration. Conversely, some consumers who currently cannot resort to 
individual litigation will be able to do so if an arbitration agreement 
is removed in toto.
---------------------------------------------------------------------------

    \1225\ See Part VI for more discussion of this issue.
---------------------------------------------------------------------------

    As discussed in detail in Part VI, the Bureau continues to believe 
that the results of the Study were inconclusive as to the benefits to 
consumers of individual arbitration versus individual litigation.\1226\ 
However, given that the 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.
---------------------------------------------------------------------------

    \1226\ See Study, supra note 3, 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. 
Resol. 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 3, 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.\1227\ 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.\1228\
---------------------------------------------------------------------------

    \1227\ Similarly, it is possible that the consumer would fare 
somewhat worse in individual arbitration than in individual 
litigation.
    \1228\ If anything, the Study showed considerably more 
individual litigation (in Federal and in small claims courts) than 
individual arbitration. See generally, Study, supra note 3, sections 
5 and 6.
---------------------------------------------------------------------------

    The Bureau requested 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. A number of industry commenters asserted that providers 
would drop individual arbitration agreements.
    Commenters made two points. First, they asserted that companies 
subsidized individual arbitration, requiring significant upfront 
expenses on filing fees and other costs, for the purpose of avoiding 
class action exposure. Thus, in their view, it would be unprofitable to 
subsidize individual arbitration if companies cannot in turn prevent 
class actions. Second, the commenters asserted that the decision to 
drop arbitration agreements would occur because it is not cost-
effective to support a dual-track system of litigation (on a class or 
putative class basis) and individual arbitrations. However, this 
reasoning conflicts with available facts.
    As discussed above in Part VI findings, the upfront costs of 
individual arbitration are likely more than offset by the reduced cost 
compared to litigating in court.\1229\ Thus, even without the ability 
to block class actions, companies would still have an incentive to 
retain their arbitration agreements. Further, the Study showed that 
providers often

[[Page 33412]]

do not invoke arbitration agreements in individual lawsuits,\1230\ and 
thus providers are already operating in such a dual-track system. In 
addition, since most individual firms do not face even one arbitration 
claim in any given year, it seems unlikely that firms are paying 
substantial fixed costs to maintain an individual arbitration program 
nor did commenters submit evidence to the contrary. Thus, the Bureau 
lacks sufficient information to determine that most providers would 
drop arbitration agreements altogether rather than adopting the 
Bureau's language if the rule is finalized as proposed.
---------------------------------------------------------------------------

    \1229\ Some commenters asserted that the cost savings were less 
significant compared to small claims court. However, a large portion 
of the arbitration claims in the Study were for amounts exceeding 
the small claims court limits in many States, so this comparison is 
not entirely apt.
    \1230\ Study, supra note 3, section 1 at 15.
---------------------------------------------------------------------------

    A third possible cost to consumers could arise if, as discussed 
above, some providers decide 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. 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-compliance with respect 
to this particular decision. The Bureau is not aware of any data 
showing this theoretical phenomenon (over-compliance) to be prevalent 
among providers who currently do not have an arbitration agreement or 
any reason to believe this would be likely among providers who will be 
required to forgo using their arbitration agreement to block class 
actions. The Bureau requested comment on the extent of this phenomenon 
in the context of the proposal but did not receive any responses.\1231\
---------------------------------------------------------------------------

    \1231\ Some commenters made a general assertion that the rule 
would stifle innovation. Although somewhat related, innovation of 
new products and services is not the same thing as the over-
compliance phenomenon described here. In any event, as described 
above in Part VI (the findings), the Bureau believes the rule is as 
likely to suppress harmful innovations as those beneficial to 
consumers.
---------------------------------------------------------------------------

    A nonprofit commenter and some industry commenters posited a fourth 
possible cost to consumers, arguing that consumers value the private 
nature of individual arbitration, and that the monitoring provision of 
the rule could compromise this. These commenters also asserted that 
consumers' private financial information could be released as a result 
of this provision if the arbitral records are made public and consumers 
are re-identified using public information. Taking the second argument 
first, the Bureau notes that several measures will sufficiently reduce 
re-identification risk. While providers must submit records redacted of 
certain personal identifiers, the Bureau will take the primary 
responsibility, prior to publication, for redacting any additional 
information needed to minimize the risk of re-identification.\1232\ The 
Bureau has extensive experience in redacting such information from its 
consumer complaints database. With regard to the first argument, the 
Bureau is not aware of any evidence that consumers who are particularly 
privacy sensitive currently seek out arbitration to handle formal 
disputes.
---------------------------------------------------------------------------

    \1232\ See Sec.  1040.4(b)(5).
---------------------------------------------------------------------------

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.\1233\ 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. Similarly, while 
the requirement that providers using pre-dispute arbitration agreements 
submit certain records relating to arbitral proceedings to the Bureau 
will, in relative terms, cost more for a small firm than a large firm, 
given the small number of overall arbitral proceedings, and the smaller 
relative likelihood of a small depository entity invoking an 
arbitration agreement, this cost will not be disproportionately borne 
by smaller entities. Additionally, even if a small depository entity 
would need to submit records of arbitral and certain court proceedings 
to the Bureau, the overall administration cost burden, as stated above, 
is relatively small.
---------------------------------------------------------------------------

    \1233\ See generally Study, supra note 3, section 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 
final rule will 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 
after the class rule takes effect.
    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.\1234\ 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.
---------------------------------------------------------------------------

    \1234\ 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.\1235\ It follows that

[[Page 33413]]

smaller defendants might fare worse in 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.
---------------------------------------------------------------------------

    \1235\ 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 proposal, 
it would be lower in rural areas.\1236\
---------------------------------------------------------------------------

    \1236\ See Weyl and Fabinger, supra note 1212; Alexandrov and 
Koulayev, supra note 1212.
---------------------------------------------------------------------------

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 Bureau expects the 
additional marginal costs due to additional Federal class settlements 
to providers 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 final rule will 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 will be diminished due to effects on providers' 
continued 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 were 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 customers. 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 or other consumer financial products or 
services.
    A Congressional commenter also stated his view that the class rule 
would likely cause financial institutions to increase their cash 
reserves held to mitigate litigation risk. The commenter stated that 
this increase in cash reserves, in turn, could reduce the amount of 
cash that institutions have available to lend to consumers and small 
businesses, or to invest in technology upgrades and employee retention. 
The commenter referred to this effect as creating ``dead capital.'' To 
the extent that financial institutions self-insure in this fashion, the 
Bureau does not believe it will substantially impact consumers' access 
to credit, as the overall costs of the rule are small relative to the 
size to the relevant markets.

G. Potential Alternatives Considered by the Bureau in Lieu of the Class 
Action Rule

    In developing the proposal and the final rule, the Bureau 
considered several potential alternative approaches in light of whether 
these potential alternatives would achieve the goals of the rulemaking 
with less burden on industry. The Bureau discussed some of these 
potential alternatives in the IRFA included in the proposal, and noted 
in the Section 1022(b)(2) Analysis that it also considered them in that 
context. The Bureau discusses potential alternatives further here, both 
in general and in light of comments received regarding potential 
alternatives.\1237\ Commenters suggested and the Bureau considered four 
general classes of potential alternatives to the proposed class rule: 
(1) Measures to increase consumer choice with respect to entering into 
arbitration agreements; (2) measures to improve consumers' access to 
and the conduct of individual arbitrations; (3) an exemption from the 
proposed class rule for potentially actionable conduct that providers 
report to regulators; and (4) an exemption from the rule for small 
businesses.\1238\ The fourth alternative, because it relates to small 
entities, is discussed in more detail in the FRFA in Part IX below.
---------------------------------------------------------------------------

    \1237\ The proposal also discussed the potential for a total ban 
on the use of arbitration agreements. Consumer advocate commenters 
generally urged that option as an alternative to the individual 
monitoring proposal, as discussed in Part VII above. In any event, 
as compared to the class rule, such an approach would not reduce 
burden as explained in the proposal. 81 FR 32830, 32921 (May 24, 
2016), and the Bureau does not discuss it further here.
    \1238\ Some commenters that suggested a small entity exemption 
requested that this exemption cover the monitoring proposal as well 
as the class rule. The Bureau discusses this potential alternative 
in the FRFA, below.
---------------------------------------------------------------------------

    Beyond these general classes of potential alternatives, commenters 
suggested other limitations to the class rule, which the Bureau has 
discussed in Part VII. Some commenters suggested exempting claims under 
specific statutes, discussed in Part VI and Part VII,\1239\ while 
others raised the possibility of excluding arbitration agreements from 
the class rule if they allow for class arbitration.\1240\ Some

[[Page 33414]]

other potential alternatives suggested by commenters would be 
infeasible or in conflict with the goals of the rulemaking, such as 
excluding consumers from participating in a class action unless they 
have exhausted informal dispute resolution \1241\ or excluding class 
claims where the attorney did not state the fees sought would be below 
a certain amount, discussed in more detail immediately below.
---------------------------------------------------------------------------

    \1239\ For discussion of claims under statutes providing for 
statutory damages or attorney's fees generally, see Part VI (Bureau 
findings that the class rule is warranted for these claims). For 
further discussion of claims under the Credit Repair Organization 
Act (CROA) in particular, see the section-by-section analysis of 
Sec.  1040.3(a)(4) above (Bureau decision not to exclude providers 
potentially subject to these claims from coverage). A nonprofit 
commenter criticized EFTA ATM ``sticker'' class actions and stated 
these cases demonstrate that the rule should exclude claims under 
statutes that do not explicitly authorize class remedies. Yet the 
Bureau notes that EFTA does provide for class remedies in 15 U.S.C. 
1693m(a)(2)(B), and in any event, the EFTA ATM ``sticker'' 
requirements have been repealed, as noted in Part VI above. To the 
extent the commenter was asserting that statutes authorizing 
statutory damages in individual actions provide sufficient 
deterrence without allowing for class actions under Federal Rule 23 
of the Federal Rules of Civil Procedure, this comment is addressed 
in Part VI above, which finds that application of the rule to class 
actions, including those seeking statutory damages, is in the public 
interest and for the protection of consumers.
    \1240\ One industry commenter and an individual commenter 
suggested the Bureau examine class arbitration as a potential 
alternative to the class rule. The industry commenter stated that 
consumers might be able to receive higher recoveries in class 
arbitration, but recognized the ``little or no data available,'' and 
did not explain why consumers might be able to receive higher 
recoveries. This is discussed in detail in the section-by-section 
analysis of Sec.  1040.4.
    \1241\ Two industry associations suggested that the Bureau allow 
arbitration agreements to block consumers from participating in 
class actions unless they had exhausted an internal dispute 
resolution process. This approach, however, would not only make it 
more difficult for consumers who recognize that they have been 
harmed to obtain legal relief to which they are entitled, but would 
foreclose relief on behalf of consumers who do not recognize that 
harm has occurred. Even if such a system would result in equal 
amounts of redress for consumers who recognize their injuries, the 
Bureau believes it would result in far less deterrent effect and 
therefore produce far less benefit than the final rule.
---------------------------------------------------------------------------

    For these reasons, and for the reasons discussed below for the 
other potential alternatives, the Bureau concludes that none of these 
potential alternatives would accomplish the goals of the class rule of 
promoting more effective compliance and remediation for non-compliance 
with laws providing for a private right of action applicable to covered 
consumer financial products and services, while minimizing any 
significant burden on providers.
    One Member of Congress suggested the Bureau consider limiting the 
percentage of attorney's fees that an attorney can demand ``in a 
lawsuit.'' However, the Bureau does not believe that lawsuit complaints 
typically state the amount of attorney's fees sought. Thus, such an 
alternative would amount to introducing a new pleading requirement on 
consumer class actions or a cap on the fees that could be awarded at 
the settlement stage--something that is the province of Congress and 
the courts and would not be appropriate for the Bureau to regulate. 
Moreover, the Bureau does not believe information needed to estimate 
the attorney's fees sought is reliably available at the outset of a 
case. As the Study showed, the dollar value of consumer harm and the 
size of the class are rarely pleaded in consumer class 
complaints.\1242\ The Bureau believes this is because this information 
is generally not reliably available at the outset of a case. The size 
of the class often is not determined until the settlement approval and 
administration process. Finally, in most consumer protection statutes 
that allow for recovery of attorney's fees, the rules for attorney's 
fees do not specify a cap. The Bureau believes there would be little 
basis for identifying a generic cap that would apply across all cases 
that are impacted by this rule. For these reasons, this policy option 
seems infeasible.
---------------------------------------------------------------------------

    \1242\ See Study, supra note 3, section 6 at 15 n.36 and 23 
n.42.
---------------------------------------------------------------------------

Potential Alternatives Involving Disclosure, Consumer Education, Opt-
In, or Opt-Out Requirements
    Several industry commenters suggested that instead of prohibiting 
firms from using pre-dispute arbitration agreements to bar class 
actions, the Bureau should instead require firms to give consumers more 
choice regarding whether and how they enter into arbitration 
agreements. These proposals took a variety of forms, including 
requiring firms to allow consumers to either to opt in to or opt out of 
pre-dispute arbitration agreements, a mandated disclosure of the 
existence and details of an arbitration agreement, and consumer 
education initiatives.
    The Bureau discusses its concerns with each of these variations in 
turn below. However, the fundamental problem with this class of 
potential alternatives is that it does not address the market failure 
that the rulemaking is intended to address--the fact that consumers 
often lack awareness that they have a legal claim and, moreover, that 
when they are aware of such claims, many are negative-value claims that 
cannot practicably be pursued in any formal dispute resolution forum 
(whether litigation or arbitration) on an individual basis. Both of 
these factors reduce firms' incentives to comply with the laws (and 
thereby correct the market failures the laws were enacted to address).
    Moreover, because the market failure identified in this rule 
relates to what happens when a claim does arise (and the consequences 
for compliance and remedies), it cannot be ameliorated by increasing 
consumers' knowledge and understanding ex ante of entering into 
arbitration agreements before these claims arise. The weak individual 
incentives for consumers to pursue these claims lead to weakened 
incentives for firms to comply with the law. While the Study revealed 
that many consumers lack awareness of arbitration agreements, and it is 
likely true that consumers are rarely able to make an informed choice 
to avoid entering into an arbitration agreement if they wish to, 
remedying this problem would not be sufficient to correct the market 
failure which is the focus of this rulemaking. Increased information 
and choice about arbitration agreements cannot increase consumers' 
knowledge of their claims, change the small value of the claims, or 
reduce the effort consumers must exert to pursue these claims in a way 
that would render them positive value, and thus address the market 
failure.\1243\ Class actions, in contrast, take these net negative 
costs, centralize them with one entity already familiar with the legal 
process who pursues the claim, and distributes net proceeds if the 
valid claim provides a net positive return. Consumers who are class 
members need to expend virtually no time in this process. The class 
attorneys may pass their fees on to consumers, but even when doing so, 
that does not render the claims net negative; consumers still receive 
positive payout amounts after accounting for legal fees, with little or 
no expenditure of their own time or money.
---------------------------------------------------------------------------

    \1243\ Indeed, the value of the time necessary for consumers to 
learn about the arbitral process, learn enough about consumer law to 
understand when they have a valid claim, and finally initiate and 
pursue the arbitral process to completion will likely often exceed 
the value of the claims discussed in the market failure section. A 
common way to measure the value of consumers' time is using their 
wages. At the 2015 U.S. median wage of $17.40, a process requiring 
several hours of time will be more costly than forgoing a claim with 
expected value of $100 or less.
---------------------------------------------------------------------------

    None of the commenters that suggested these potential alternatives 
articulated how the proposed alternatives would accomplish the Bureau's 
goals.\1244\ As such, the Bureau believes that none of the suggested 
alternatives aimed at improving consumer choice will achieve the goals 
of the rulemaking.\1245\
---------------------------------------------------------------------------

    \1244\ One industry commenter stated that its proposed 
alternative would allow consumers to choose for themselves whether 
they prefer arbitration or litigation. As noted above, consumers' 
preferences over the forum for individual dispute resolution are not 
the focus of the rulemaking--the market failure in question is a 
problem of collective action. Other commenters simply said that the 
Bureau should have considered the suggested alternative without 
further explanation.
    \1245\ The Bureau is in general concerned about consumer 
awareness of contract terms and the ability of consumers to make 
informed choices about consumer financial products and services. 
Several industry commenters have noted certain public statements 
about transparency and consumer choice in the context of arbitration 
agreements. Nonetheless, as the rulemaking record reflects, the lack 
of transparency and choice regarding pre-dispute arbitration 
agreements is not the rationale for the class action provision of 
the final rule.
---------------------------------------------------------------------------

    With respect to the specific alternatives suggested, the Bureau 
received some comments that suggested

[[Page 33415]]

the rule could mandate opt-out agreements that could allow consumers to 
remove themselves from the obligation to pursue individual arbitration 
in lieu of participating in a class action.\1246\ One credit union 
industry commenter argued that consumers should have this opportunity 
as a right, while a credit union trade group also promoted it under the 
rubric of providing consumers with more choices. Another industry 
commenter offered that opt-outs make sure consumers are not ``forced'' 
into arbitration. An industry trade association commenter, under 
similar logic, maintained that the Bureau did not adequately consider 
the potential of a combination of consumer education and opt-outs. 
Another industry trade association commenter argued that knowledgeable 
consumers might choose not to opt out because they decide that 
arbitration is superior to individual or class action litigation. 
Finally, an industry commenter and a research center cited an example 
from the 1990s where a provider offered a price discount to existing 
customers who chose not to opt out of a new arbitration agreement. 
These commenters suggested that this could allow consumers to choose 
what is more important to them: Price or non-arbitration dispute 
options.
---------------------------------------------------------------------------

    \1246\ In an opt-out agreement, the default for consumers is 
that they would be subject to the arbitration agreement if they 
become a party to the contract. However, the provider would allow 
consumers to ``opt out'' of the arbitration agreement so that that 
part of the contract would not apply to them. If the arbitration 
agreement could be used to block a class action, only those 
consumers who opted out would be able to file or participate in a 
class action. Any class settlement would not apply to those 
consumers who did not take the affirmative step to opt out of the 
arbitration agreement.
---------------------------------------------------------------------------

    For many of the same reasons already discussed, the Bureau believes 
that requiring opt-out arrangements would not meet the objectives of 
the proposal because they would not alleviate the market failure that 
the class rule seeks to address. Opt-out agreements will not make 
consumers aware they have a legal claim in the future, nor will such 
agreements make negative-value claims worth pursuing. The timing of 
decisions becomes a factor as well--consumers generally choose whether 
to be part of an arbitration agreement at the outset of their customer 
relationship, while firms make compliance decisions continually over 
time.\1247\ As such, there is no reason to believe that opt-out 
provisions would materially influence firms' compliance decisions, nor 
did commenters suggest that they would. Further, a number of providers 
in markets for consumer financial services used opt-out agreements in 
the course of adopting their current arbitration agreements, but the 
Study showed that very few consumers are aware whether they have 
arbitration agreements in their contracts. This suggests that such 
regimes are subject to many of the same awareness and effectiveness 
issues discussed below with regard to disclosures.
---------------------------------------------------------------------------

    \1247\ An exception would be if firms add an arbitration clause 
to their existing contracts and notify consumers of the opportunity 
to opt out at that time. Even then, the provider's compliance 
decisions are made over time after the opportunity to opt out.
---------------------------------------------------------------------------

    Furthermore, even if the Bureau's goals in this rulemaking was to 
enhance informed consumer decision-making with respect to the potential 
risks and benefits of entering into adhesion contracts that contain 
arbitration agreements, there is reason to doubt that mandated opt-out 
provisions would be effective in promoting informed consumer decision-
making, even if coupled with consumer education or improved or 
additional disclosures. Although there is limited evidence specific to 
the context of arbitration, there is extensive academic literature 
showing that consumers frequently do not opt to leave a default option, 
even if it would be advantageous for them to do so.\1248\ In this 
respect an opt-out regime would only marginally increase firms' class 
action exposure relative to the status quo.\1249\ The commenters that 
suggested that mandatory opt-out provisions did not provide any 
evidence that consumers would be any more likely to opt-out of 
arbitration agreements, compared to opt-outs in other contexts, 
offering only that consumers sometimes take advantage of existing opt-
out provisions.\1250\
---------------------------------------------------------------------------

    \1248\ See Stefano DellaVigna, ``Psychology and Economics: 
Evidence from the Field,'' 47 J. Econ. Lit. 2 (2009) (for a review 
of this literature).
    \1249\ For instance, auction site eBay engineered its opt-out 
provision specifically as a means of shielding the company from 
class action liability, and achieved a very low opt-out rate. Ted 
Frank, ``Class Actions, Arbitrations and Consumer Rights: Why 
Concepcion is a Pro-Consumer Decision,'' MI Report (Feb. 19, 2013). 
One commenter cited this report as an example of consumers being 
happy with arbitration clauses, an argument that is at odds with the 
source material.
    \1250\ The Bureau acknowledges that mandatory opt-in or opt-out 
policies have been set by regulation in consumer financial 
regulation, most notably Regulation E's opt-in regime for overdraft 
services. 12 CFR 1005.17(b).
---------------------------------------------------------------------------

    In a related series of comments, industry commenters, trade 
associations and a nonprofit commenter also suggested that the Bureau 
mandate new disclosures to accompany arbitration agreements that block 
class actions as an alternative to the class rule. These commenters 
focused on the problem of lack of consumer awareness about the possible 
future consequences of entering into an arbitration agreement. In 
support, these commenters cited to the Bureau's lack of consumer 
education on arbitration and the Bureau's support of improved 
disclosure in other contexts. The Bureau's primary focus in this 
rulemaking, however, is not the problem that improved disclosure 
purports to fix. Thus, the market failure this rule seeks to address 
would remain even if the Bureau mandated the best possible form of 
disclosure proposed by some commenters, including, among other 
features, plain language and large, clear fonts on pages separate from 
the rest of the financial contract, coupled with increased consumer 
education efforts (whether by the providers, regulators, or both). 
Moreover, as discussed in Part VI, above, the disparity in numbers 
between the few hundred consumers who currently pursue individual 
claims in arbitration and the tens of millions annually who are part of 
a putative class makes it difficult to imagine that any kind of 
information intervention could bridge the difference.
    In any event, there is reason to doubt that disclosures would be 
very effective in raising consumer awareness, even coupled with 
consumer education or mandated opt-out provisions. The Study indicated 
that current consumer understanding of arbitration agreements is 
low.\1251\ The Bureau believes that even with the most effective 
disclosures and education it is unlikely that many consumers could, at 
the outset of a customer relationship, anticipate that the provider 
will act unlawfully not only to the consumer but to a putative class, 
and accurately assess the value of these dispute-resolution rights in a 
hypothetical future scenario.\1252\
---------------------------------------------------------------------------

    \1251\ Despite contract language and placement that is not 
dramatically different from that of other contract provisions.
    \1252\ See Study, supra note 3, section 3 at 16-23. Two 
individual commenters suggested the rule could mandate opt-in 
arbitration agreements that could be used to block class actions 
only for consumers who actively consented to be a part of that 
agreement. Neither commenter seemed to envision that many consumers 
would actually opt in. An industry commenter suggested that the rule 
should allow companies to offer either opt out or opt in. A State 
attorney general commenter noted that consumers generally lack 
awareness of opt-out regimes, and also observed opt-in regimes are 
fair and reasonable but did not actually suggest that the Bureau 
adopt such a rule. Because the Bureau believes that it is unlikely 
that many consumers would actively opt in to a pre-dispute 
arbitration agreement absent inducement, in principle such an 
alternative could achieve much of the benefits of the final rule. 
However, the Bureau believes that consumers will face the same 
difficulties in making an informed decision to opt in as they would 
to opt out. The Bureau is also concerned that providers would raise 
prices and offer equivalent small incentives to induce consumers to 
opt in. Because of the difficulty in making an informed decision to 
opt in or opt out of pre-dispute arbitration agreements, such 
incentives might have sufficient take-up to effectively shield 
providers from class action exposure, undermining the goals of the 
rule.

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

[[Page 33416]]

    In sum, the Bureau believes it is unlikely that firms would be able 
to implement an opt-out program that is effective at enabling informed 
choices. But more importantly, as noted above, a lack of consumer 
awareness and choice regarding pre-dispute arbitration clauses is not 
the market failure that the rule is trying to address, and even without 
the problems detailed above, disclosures or opt-in/opt-out provisions 
will not address the market failure of insufficient deterrence.
Potential Alternatives Involving Features of the Arbitration Process
    Some commenters suggested alternatives aimed at making individual 
arbitration easier, cheaper, or more desirable to consumers. These 
included proposals intended to lower the costs of arbitration, reduce 
barriers to entry, or increase the potential value of consumers' 
claims. The premise of these alternatives is that small dollar claims 
would be easier for consumers to prosecute as a result of these 
changes, the demand for individual arbitration would increase, and 
class action litigation would not be necessary.
    Specifically, the commenters suggested that the Bureau mandate that 
providers incorporate certain features into their arbitration 
agreements such as advancement of filing fees and legal costs to 
consumers when they bring a claim; improving consumers' knowledge and 
understanding of the arbitration process for purposes of enabling them 
to file a claim in the event of a dispute; requiring easily accessible 
venues for arbitrations such as online forums and online filing of 
documents; and providing for rapid adjudication. These features all 
would, in the view of the commenters, lower the costs of entry to 
arbitration, so that fewer claims are negative-value claims. For 
purposes of this analysis, the Bureau considers all of these cost-
reducing alternatives jointly as one alternative.
    As an initial matter, even if demand for individual arbitration 
increased enough to be as strong a deterrent to illegal behavior as 
class action litigation, it is far from clear that this would reduce 
the burden to industry as compared to the class rule. The Study found 
only a few hundred claims related to consumer financial products filed 
each year by consumers, compared to millions who were part of a 
putative class. Even if only a small fraction of affected consumers 
filed arbitration claims, this would be several orders of magnitude 
more than firms currently face. A thousand-fold increase in individual 
arbitration claims could be more expensive to defend against than class 
actions. Moreover, even under ideal circumstances individual 
arbitration is not suited to providing prospective conduct 
relief.\1253\
---------------------------------------------------------------------------

    \1253\ In principle, a firm might change its general practices 
in the face of a large number of successful arbitration claims. In 
practice, a firm is likely to have a substantial number of informal 
complaints about a practice, either made to the firm's customer 
service or through other venues such as the Bureau's complaint 
database, well before any large number of individual arbitration 
claims accrue. The Bureau believes it is unlikely that there are a 
substantial number of firms that would voluntarily change their 
practices in response to a large volume of arbitrations but would 
not already do so in response to the previous volume of informal 
complaints.
---------------------------------------------------------------------------

    That being said, the Bureau believes that reducing the costs of 
individual arbitration, while a laudable goal, would not increase 
demand for individual arbitration enough to provide a deterrent that 
would substitute for class action exposure. First, improved access to 
individual arbitration does nothing for consumers who are not aware 
that they have a legal claim. Second, the Bureau notes that many of the 
features suggested by commenters are already relatively common in 
arbitration agreements,\1254\ yet the Bureau's Study showed that there 
were few individual claims filed in arbitration. This suggests that 
there is a systemic limit to what consumers acting on their own will be 
willing or able to do to address their concerns, even when they are 
aware of a problem and have access to a low-cost means of pursuing 
redress.
---------------------------------------------------------------------------

    \1254\ Study, supra note 3, section 2 at 31.
---------------------------------------------------------------------------

    The Bureau also considered, in combination with the cost-reducing 
potential alternatives discussed above, an intervention suggested by an 
industry commenter and a nonprofit commenter that, in their view, would 
increase the perceived value of claims brought in individual 
arbitration. Specifically, commenters suggested that the Bureau mandate 
that arbitration agreements include clauses that provide for some 
additional payment to consumers in cases in which four conditions are 
satisfied: A company makes a settlement offer to the consumer, the 
consumer rejects the offer, an arbitrator makes an award in favor of 
the consumer, and the award provides for relief that exceeds the amount 
of the settlement offer. The premise of this intervention is that it 
would shift the balance of costs and benefits for consumers with a 
claim, increasing the demand for arbitration. However, although the 
commenters pointed to examples of these types of policies in existing 
agreements, they did not identify evidence that consumers actually 
pursue individual arbitration more often in response to the presence of 
such clauses, nor is the Bureau aware of any.
    As with the cost-reducing options discussed above, the Bureau notes 
that conditionally increasing the payout to consumers from individual 
arbitration will not make consumers aware that they have a claim if 
they were not otherwise aware. Moreover, and for similar reasons as in 
the discussion regarding statutory damages in Part VI (whether 
providing for minimum recovery or punitive damages), the Bureau 
disagrees that the additional incentives would be large enough to 
persuade large numbers of consumers to pursue claims that they are 
aware of and that today they decline to pursue. In order for these 
incentives in arbitration agreements to make an impact, consumers must 
both be aware that they have a claim and believe an otherwise small 
claim also presents a meaningful opportunity for additional recovery. 
As to the latter, the Bureau does not believe these contract awards 
meaningfully increase the expected value of claims at the time 
consumers decide whether to pursue them. First, consumers must evaluate 
the potential likelihood of an arbitrator finding in their favor. 
Second, they must condition their expected additional payout on the 
likelihood that the firm will provide a settlement offer before 
judgment. Third, they must evaluate the likelihood that the firm will 
provide a settlement offer lower than the payout that might in the 
future be awarded by the arbitrator. Thus, any supplemental payout is 
contingent on decisions made by the consumer, the firm, and the 
arbitrator, and the actual expected supplemental payout is the value of 
that supplemental payout times these three separate probabilities, 
since a specific contingent outcome must occur in each of the 
conditions. That expected award, as it is a factor of several values 
less than or equal to one, is likely to be very small and difficult to 
accurately estimate. Because the resulting expected payout will still 
be small, it is unlikely that a low probability of a supplemental 
payment will make an otherwise negative-value claim positive even for a 
risk-neutral consumer. This expected payout is also only considered by 
the subset of consumers who understand they have a pursuable claim. 
Thus, the Bureau does not believe that conditional contract awards 
would increase the demand for

[[Page 33417]]

arbitration beyond the other options already described above, which 
also are insufficient to replace class actions for the reasons 
discussed above.
Safe Harbor for Conduct Reviewed by, or Self-Reported to, Government 
Regulators
    The Bureau generally considered potential alternatives related to 
public enforcement in the proposal, but received comments only on one 
particular potential alternative.\1255\ Three industry commenters and 
their trade associations urged the Bureau to adopt a safe harbor or 
exemption from the class rule for conduct that has been reviewed by, or 
been self-reported to, government regulators as promoted by the 
Bureau's Bulletin on Responsible Business Conduct.\1256\ Under this 
potential alternative, the class rule would not apply to a class action 
concerning such conduct. As a result, an arbitration agreement could be 
used to block such a class action.
---------------------------------------------------------------------------

    \1255\ 81 FR 32830, 32922 (May 24, 2016).
    \1256\ Bureau of Consumer Fin. Prot., ``Responsible Business 
Conduct: Self-Policing, Self-Reporting, Remediation, and 
Cooperation,'' CFPB Bulletin, No. 2013-06 (June 25, 2013) (calling 
upon companies to take responsible conduct including ``promptly 
self-report[ing] to the Bureau when [they] identif[y] potential 
violations'').
---------------------------------------------------------------------------

    These comments stated that this potential alternative would reduce 
firms' exposure to unmeritorious cases because unlike class action 
attorneys, public regulators bring more meritorious cases. These 
commenters also stated consumers would benefit more because public 
regulators achieve more meaningful relief for consumers than class 
action attorneys, and do not charge their attorney's fees to providers. 
Accordingly, in the commenters' view, as long as a public regulator is 
aware of an issue, there is no need for class actions.
    The commenters further argued that this alternative would address 
the market failure this rule seeks to address (reduced incentive to 
comply with the law) because it would not allow arbitration agreements 
to eliminate exposure. Rather, it would only allow companies to 
eliminate class exposure if they were willing to create public 
enforcement exposure (by self-reporting) or already are subject to 
public enforcement exposure (by virtue of a regulatory review of their 
conduct). The commenters also asserted that the alternative would 
accomplish the Bureau's goals with a reduced burden because providers 
would be able to block class actions which assert non-meritorious 
claims that public enforcement was not willing to assert, as well as 
follow-on class actions that in the commenters' view are unnecessary 
when public enforcement has already resolved the problem.
    The Bureau acknowledges that public enforcement can be more 
efficient than private actions at achieving redress for consumers, 
compared to private actions. However, as discussed in Part VI above, 
due to resource constraints and limits on legal authority there are a 
number of reasons that a regulator may not pursue an action, or may 
achieve less than full redress, in spite of the merits of the 
underlying claims. This may particularly occur for violations with 
relatively low aggregate harm, as a regulator should reasonably 
prioritize a case with harm to thousands of consumers over one with 
harm to hundreds, even if consumers in both groups suffer equal 
individual harm. In addition, regulators are only authorized to bring 
certain types of legal claims. As such, providing a broad safe harbor 
for conduct self-reported to or investigated by public regulators would 
undermine the goals of the rule by removing the deterrent effect of 
class actions for such claims that public regulators cannot bring or 
reasonably prioritize.
    Even if this were not true, the Bureau believes that the safe 
harbor articulated by the commenters would be infeasible in practice. 
Below the Bureau describes the problems with implementing the potential 
alternative suggested by the commenters. The Bureau also considered a 
more limited version of a safe-harbor for self-reporting, described 
below, but concludes that this would not provide a substantial 
reduction in burden, and would also be inconsistent with the goals of 
the rule.
    Considering the version of the potential alternative proposed by 
commenters, the essential problem is that the mechanism to trigger the 
safe harbor is unworkable. To begin with, allowing a safe harbor to be 
raised in private litigation for conduct that is the subject of a 
regulatory investigation is incompatible with the procedures of such 
investigations.\1257\ The broad exemption for self-reporting envisioned 
by the commenters is problematic as well. The commenters seem to intend 
that a self-report of any conduct involving any potential legal claims 
to any regulator would suffice to trigger the safe-harbor. However, the 
Bureau believes this level of flexibility would in practice undermine 
the goals of the rulemaking, effectively giving the provider an option 
for drastically reducing the deterrent effect of class actions by 
terminating private claims that could not legally or practicably be 
brought by the agency that receives the self-report. Providers could 
choose to report a violation to a regulator that does not enforce the 
relevant law, does not have jurisdiction, or does not prioritize 
enforcement of that law. For instance, the final rule will apply to all 
financial institutions, but pursuant to Dodd-Frank section 1026 the 
Bureau does not have enforcement authority over depository institutions 
with assets of $10 billion or less and its supervisory authority with 
respect to such institutions is limited to information gathering, and 
would be unable to act on a self-report from such an entity. Similarly, 
it is possible that a provider facing a class action in State court 
regarding treatment of a class of consumers in that jurisdiction could 
report to that State's regulator only upon receiving the lawsuit, 
effectively removing its national liability in the process. It is also 
possible that a provider could report a violation to a regulator with a 
mission that is primarily focused on its safety and soundness and not 
on the protection of consumers.
---------------------------------------------------------------------------

    \1257\ In order for a provider to invoke the suggested safe 
harbor, the regulatory action and its scope would have to be 
disclosed to the court in the motion to compel arbitration. However, 
it is difficult to understand how a provider could accurately 
describe the scope of a regulator's investigation to a court, as 
regulators do not typically explain the full scope of their 
investigations to the targets of those investigations. Nor would it 
be appropriate to put the regulator in the position of providing 
information about its confidential investigations in the context of 
a private lawsuit. This would further place a strain on their 
limited resources and thus may interfere with their enforcement 
priorities. Further, the investigations of many regulators besides 
the Bureau are confidential to preserve the integrity of the 
investigation. In many cases this confidentiality is required by 
statute. Thus, the Bureau does not believe that it would be feasible 
for a safe-harbor to be based upon ongoing investigation activity.
---------------------------------------------------------------------------

    Given the difficulties with a broad exemption for conduct self-
reported to regulators, the Bureau also considered a more limited 
potential alternative. Specifically, the Bureau considered a safe-
harbor for conduct violating a Federal consumer financial law (FCFL) 
enforced by the Bureau against the reporting person, which is reported 
to the Bureau. This potential alternative would avoid the issues 
discussed above that make the version proposed by commenters 
infeasible. Confidential investigations would not be implicated, and 
the Bureau would have legal authority to pursue an enforcement action 
if warranted. However, the Bureau's practical ability to pursue 
enforcement actions would still be subject to resource and 
prioritization constraints. Moreover, in light of the

[[Page 33418]]

more limited scope of the safe harbor, the Bureau believes that this 
narrower safe-harbor would not provide a substantial reduction in 
burden to providers, while at the same time harming the goals of the 
rule by reducing deterrence for some violations of FCFLs.
    Specifically, the Bureau believes that a safe harbor for conduct 
reported to it might decrease but would not minimize the burden of the 
rule on providers. While under the potential alternative making a self-
report would shield a firm from class-action liability for FCFLs, it 
would not shield the firm from class-action liability under other 
claims. As the Study noted, more than 63 percent of Federal court class 
actions in selected markets asserted State law claims.\1258\ The fact 
that such residual exposure would exist suggests that in a substantial 
majority of cases, companies could not block a class action as a result 
of the exclusion, but instead could only block certain claims in a 
class action (i.e., claims of FCFL violations). As a result, at best 
the exclusion would only allow providers to gain leverage over certain 
potential class claims, rather than avoid class litigation 
entirely.\1259\ Indeed, the benefits would probably be the smallest 
from frivolous class action lawsuits, as, all else equal, these are 
more likely to be brought with a variety of claims.
---------------------------------------------------------------------------

    \1258\ Study, supra note 3, section 6 at 19.
    \1259\ The Bureau also notes that to the extent that the 
proposed alternative reduces firms' class action liability, the need 
to litigate over the applicability of the exemption counteracts some 
of the reduction in burden. Parties would likely incur new costs and 
time delays in litigating arbitration motions, trying to figure out 
whether the subject of a class action (and the related size and 
scope of the class) matched the subject, size, and scope of the 
defendant's self-report. Currently, it already takes companies a 
significant amount of time to persuade a court to grant a motion to 
compel arbitration terminating a class action. According to the 
Study (Section 6 at table 7), this took on average almost 500 days. 
Under the potential alternative, courts would need to determine 
several additional complex issues, extending the time and cost of 
litigating a motion to compel arbitration. Moreover, uncertainty 
over how courts would make these determinations would only reduce 
the potential for increased self-reporting in the first place. 
Finally, resolution of any claims that were not compelled to 
arbitration would have been delayed, potentially substantially, 
which would not serve the consumer protection goals of the rule.
---------------------------------------------------------------------------

    As a result, rather than reducing the burden to providers from 
frivolous lawsuits, the potential safe-harbor would instead compromise 
the deterrent effect of the rule. The Bureau believes this would 
primarily occur for law violations with relatively low aggregate harm. 
The Bureau's enforcement resources are limited, and the Bureau may not 
be able to bring enforcement actions in cases with low aggregate harm, 
even if an action would be justified in a world with unlimited 
resources. The proposed safe-harbor would thus block class actions with 
limited countervailing risk of public enforcement, lowering deterrence. 
In contrast, for violations with large aggregate harm, a self-report 
would also increase the likelihood of public enforcement by the Bureau, 
perhaps substantially. As a result, the Bureau believes that firms 
would only make an additional self-report if the avoided risk of class 
action liability outweighed the increased risk of Bureau action. Given 
these competing risks, the Bureau does not believe most providers would 
see sufficient benefit from the alternative to outweigh the costs of 
exercising it for serious violations of the law, save for cases where 
the provider would self-report anyway.\1260\ On balance, the Bureau 
believes that the potential alternative at best would have no effect on 
overall deterrence and compliance with the law, and at worst will have 
a deleterious effect on compliance.\1261\
---------------------------------------------------------------------------

    \1260\ The Bureau also notes that potentially even this narrow 
exemption could be abused by firms who ``self-report'' information 
they accurately believe is already known to the Bureau. Such 
superfluous self-reports would not have any effect on firms' 
compliance decisions, nor on public enforcement--in such cases the 
Bureau's decision of whether or not to bring a case would not be 
altered by the nominal self-report. While in principle the potential 
alternative could carve out information that is already known to the 
Bureau or publicly available, this would require the Bureau to 
become involved in the court's decision whether to allow the 
arbitration agreement to block the class action, by verifying that 
the self-report contained new information or was otherwise made in 
good faith. For example, under the Bureau's Responsible Conduct 
Bulletin, it assesses whether the company ``voluntarily disclosed 
material information not directly requested by the Bureau or that 
otherwise might not have been uncovered.'' The Bureau does not 
believe it should be required to make this assessment in the context 
of private litigation.
    \1261\ One industry commenter suggested that the Bureau could 
make the safe harbor temporary, i.e., until the Bureau completed its 
investigation. However, the Bureau does not believe that approach 
would be feasible. Arbitration agreements are used to obtain stays 
or dismissal of class actions in favor of arbitration. Thus, there 
is currently no procedure for using an arbitration agreement as a 
basis for obtaining a general stay on the class litigation, without 
also proceeding to arbitration. Yet if arbitration of the named 
plaintiff's claim on an individual basis proceeded, this would not 
preserve the status quo of the class action during the pendency of 
the Bureau's investigation. Alternatively, if the arbitration 
agreement were used to dismiss the class claims during the temporary 
period, this would raise complex questions under statute of 
limitations laws, which could preclude refiling of the case after 
the Bureau's investigation.
---------------------------------------------------------------------------

    To summarize, after further consideration and for the reasons 
outlined above, the Bureau does not believe that a self-reporting 
exemption, including the one suggested by commenters, would be workable 
or promote the goals of this rulemaking. And while the Bureau has 
considered a narrower alternative that might be more workable as a 
practical matter, that alternative does not appear likely to reduce 
burden without compromising the ability of the rule to provide 
deterrence for certain violations, and thus also seems unlikely to 
accomplish the Bureau's goals.

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.\1262\ These analyses must 
``describe the impact of the proposal on small entities.'' \1263\ An 
IRFA or FRFA is not required if the agency certifies that the proposal 
will not have a significant economic impact on a substantial number of 
small entities.\1264\ 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.\1265\
---------------------------------------------------------------------------

    \1262\ 5 U.S.C. 601, et seq.
    \1263\ 5 U.S.C. 603(a). For purposes of assessing the impacts of 
the proposal 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).
    \1264\ 5 U.S.C. 605(b).
    \1265\ 5 U.S.C. 609.
---------------------------------------------------------------------------

    In the proposal, the Bureau did not certify that the proposal 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 SBREFA to 
consider the impact of the proposal on small entities that would be 
subject to the rule and to obtain feedback from representatives of such 
small entities. The Small Business Review Panel for the proposal is 
discussed in the SBREFA Report. The proposal also contained an IRFA 
pursuant to section 603 of the RFA, which among other things estimated 
the number of small entities that would be subject to the proposal. In 
this IRFA, the Bureau described the impact of the

[[Page 33419]]

proposal on those entities, drawing on the proposal's Section 
1022(b)(2) Analysis. The Bureau also solicited comment on any costs, 
recordkeeping requirements, compliance requirements, or changes in 
operating procedures arising from the application of the proposal to 
small businesses; comment regarding any Federal rules that would 
duplicate, overlap, or conflict with the proposal; and comment on 
alternative means of compliance for small entities. Comments that 
addressed the impact on small entities are discussed below. Many of 
these comments implicated individual provisions of the final rule or 
the Bureau's Dodd-Frank Act Section 1022(b)(2) Analysis discussion and 
are also addressed in those parts.
    Similar to its approach in the proposal, the Bureau is not 
certifying that the final rule will not have a significant economic 
impact on a substantial number of small entities. Instead, the Bureau 
has completed a FRFA as detailed below. However, the Bureau continues 
to believe that the arguments and calculations outlined both in the 
Section 1022(b)(2) Analysis and the FRFA below, as well as the comments 
received on the IRFA, strongly suggest that the final rule will not 
have a significant economic impact on a substantial number of small 
entities in any of the covered markets.

1. Statement of the Need for, and Objectives of, the Final Rule

    As the Bureau outlined in the SBREFA Report and discussed above, 
the Bureau considered a rulemaking because it was concerned that by 
blocking class actions, arbitration agreements reduce deterrent effects 
and compliance incentives in connection with the underlying laws. The 
Bureau was also 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. Finally, the Bureau was concerned about the 
potential for systemic harm if arbitration agreements were to be 
administered in biased or unfair ways. Accordingly, the Bureau 
considered 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. 
The 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.\1266\
---------------------------------------------------------------------------

    \1266\ 12 U.S.C. 5518(b).
---------------------------------------------------------------------------

2. Statement of the Significant Issues Raised by the Public Comments in 
Response to the IRFA, a Statement of the Assessment of the Agency of 
Such Issues, and a Statement of Any Changes Made as a Result of Such 
Comments

    In accordance with section 603(a) of the RFA, the Bureau prepared 
an IRFA. In the IRFA, the Bureau estimated the possible compliance 
costs for small entities with respect to each major component of the 
rule against a pre-statute baseline. The Bureau requested comment on 
the IRFA.
    Very few commenters specifically addressed the IRFA. A number of 
commenters suggested potential alternatives, some but not all of which 
were intended to reduce the burden of the rule on small entities. The 
Bureau discusses comments relating to a small entity exemption below, 
in section 6 of this FRFA. The Bureau discusses comments relating to 
other potential alternatives in Part VIII, above. As noted in those 
sections, the Bureau has decided not to adopt any of the potential 
alternatives suggested by commenters, as the Bureau believes that these 
potential alternatives will not substantially reduce burden to 
providers without compromising the objectives of the rule.
    Several insurance industry commenters and their trade associations 
and an association of State insurance regulators expressed concern 
regarding whether, in the IRFA, the Bureau had even considered 
potential effects of the proposal on life insurers that may offer other 
consumer financial products or services. As is explained above in the 
section-by-section analysis of Sec.  1040.3(a)(1), although an 
insurance company could be covered by the rule to the extent that it 
offers consumer financial products that are not part of the business of 
insurance, the Bureau believes it is unlikely that there are many, or 
even any, such firms.

3. Response to the Small Business Administration Chief Counsel for 
Advocacy

    In the FRFA, the Bureau has taken into account feedback received in 
interagency communications with the SBA.

4. Description of and Estimate of the Number of Small Entities to Which 
the Final Rule Will Apply

    As noted in the SBREFA Report, the Panel identified 22 categories 
of small entities that may be subject to the proposal. 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
------------------------------------------------------------------------
                                                     SBA small business
         NAICS description            NAICS code          threshold
------------------------------------------------------------------------
All Other Nondepository Credit              522298  $38.5m in revenue.
 Intermediation.
All Other Professional,                     541990  $15m in revenue.
 Scientific, and Technical
 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                524126  1,500 employees.
 Insurance Carriers.
Financial Transactions Processing,          522320  $38.5m in revenue.
 Reserve, and Clearinghouse
 Activities.
Mortgage and Nonmortgage Loan               522310  $7.5m in revenue.
 Brokers.
Other Activities Related to Credit          522390  $20.5m in revenue.
 Intermediation.

[[Page 33420]]

 
Other Depository Credit                     522190  $550m in assets.
 Intermediation.
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              532120  $38.5m in revenue.
 (Recreational Vehicle) Rental and
 Leasing.
Used Car Dealers..................          441120  $25m in revenue.
Utilities (including Electric                  221  between $15-$27.5m
 Power Generation, Transmission,                     in revenue or 250-
 and Distribution of Electric                        1,000 employees.
 Power, Natural Gas, Water/Sewage,
 and other systems).
Wired Telecommunications Carriers.          517110  1,500 employees.
Wireless Telecommunications                 517210  1,500 employees.
 Carriers (except Satellite).
------------------------------------------------------------------------

    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 will be covered. 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).\1267\ 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.\1268\
---------------------------------------------------------------------------

    \1267\ The Bureau also used data from the Census Bureau, 
including the Census Bureau's Statistics of U.S. Businesses.
    \1268\ See Small Bus. Admin. Off., ``SBA's Size Standards 
Analysis: An Overview on Methodology and Comprehensive Size 
Standards Review,'' Presentation of Sharma R. Khem at 4 (2011), 
available at http://www.gtscoalition.com/wp-content/uploads/2011/07/Size-Stds-Presentation_Dr.-Sharma-SBA.pdf.
---------------------------------------------------------------------------

    NAICS numbers were taken from the 2012 Economic Census, 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.\1269\ 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.\1270\
---------------------------------------------------------------------------

    \1269\ 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, and Cable Television. 
The Bureau also started work on a few other markets before 
determining that the results were unlikely to be sufficiently 
representative for the purposes of this analysis.
    \1270\ 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, GPR 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 to 20 percent, 20 to 50 percent, 
50 to 80 percent, and 80 to 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 to 20 percent).

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

[[Page 33421]]

    The table below sets forth 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 
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 final rule will 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.\1271\ However, the Bureau believes that arbitration agreements 
are not prevalent in the consumer mortgage market.\1272\ 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 rule. The Bureau lacks data on 
the number of such businesses and the extent to which they are 
primarily engaged in brokering. The Bureau requested these data and 
data on the use of contracts and on the prevalence of arbitration 
agreements by these providers, but did not receive any responses.
---------------------------------------------------------------------------

    \1271\ NAICS 522292 is similarly excluded from estimates.
    \1272\ Since 2013, Bureau regulations have prohibited using 
PDAAs in most types of consumer mortgages. See 12 CFR 1026.36(h).
---------------------------------------------------------------------------

    Merchants are not listed in the table because merchants generally 
will not be covered by the final rule, 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.\1273\ In those rare circumstances (for example, 
acting as a TILA creditor due to lending with a finance charge), then 
the merchants will be covered by the final rule 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 requested comment and data on the frequency of these 
transactions, by industry, but did not receive any response.
---------------------------------------------------------------------------

    \1273\ 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 final 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 that are immune from suit as an arm of the State will 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.\1274\
---------------------------------------------------------------------------

    \1274\ 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 final rule will 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 
will 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.\1275\
---------------------------------------------------------------------------

    \1275\ 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 
automobile lenders with the Sales Financing category (NAICS 522220).
    This analysis does not account for various types of entities that 
are indirectly affected (and thus would likely not need to change their

[[Page 33422]]

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).
    Small government entities at the State and local level, in theory, 
also could be affected to the extent they use arbitration agreements 
and are not an arm of the State. The Bureau does not have data 
indicating such use of arbitration agreements by such small government 
entities is widespread, however, and the Bureau did not receive any 
comments from these governmental providers, even though the proposal 
did not call for their complete exemption.\1276\
---------------------------------------------------------------------------

    \1276\ The Bureau received a number of comments from Tribal 
government entities involved in the small-dollar credit industry. 
The impact on those entities is captured in the table below. Note, 
however, that the figures in the table may somewhat overstate the 
number of such entities, as the final rule exempts entities that are 
an arm of a Tribal government, which may include some small-dollar 
credit providers.
---------------------------------------------------------------------------

    Similarly, the Bureau is unaware of the number of software 
developers (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. 
The Bureau requested comment on this issue, and no commenters disputed 
this assertion.
    Some merchants extending consumer credit with no finance charge may 
use third parties to service these transactions, as an industry trade 
association noted in its comment. Whether affiliated with the merchant 
or not, those persons may be covered by Sec.  1040.3(a)(1)(v). When the 
merchant uses a pre-dispute arbitration agreement, there is a 
possibility that agreement could apply to third parties such as a 
servicer, depending on the facts and applicable law. The commenter did 
not provide data on how often such credit is extended, how often the 
merchants extending such credit use third parties to service it, how 
often the merchants use pre-dispute arbitration agreements, or how 
often the servicers may be covered by such agreements. The Bureau is 
not in a position to estimate how many third-party merchant servicers 
may be included in this coverage and as such does not include them in 
the table below.
    Finally, the final rule expanded the scope from the proposal to 
include providers of credit repair services even when these services 
were unrelated to debt settlement (which was covered by the proposal). 
However, the Bureau believes that these credit repair providers were 
already counted in the table below under NAICS code 541990, and no 
update to the table is needed in that respect.\1277\
---------------------------------------------------------------------------

    \1277\ According to a GAO report, in 2015 there were about 50 to 
60 companies providing identity theft services, including credit 
monitoring. (GAO Report. No. 17-254 (Mar. 2017) at 6-7. As the GAO 
noted, no agency or trade association collects comprehensive data on 
the industry and census data classifies identity theft protection 
services in a catch-call category (NAICS 812990) for ``other 
personal services'' that includes about 50 different types of 
services ranging from astrology services to wedding planning. 
Accordingly, both because of the number of providers estimated by 
GAO and because of the inability to estimate the number using Census 
data, credit monitoring is not separately listed on the table below, 
except for the counting of consumer reporting agencies, which are 
significant participants in this market.
---------------------------------------------------------------------------

BILLING CODE 4810-AM-P

[[Page 33423]]

[GRAPHIC] [TIFF OMITTED] TR19JY17.003

BILLING CODE 4810-AM-C

5. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements of the Proposal, 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

    As discussed above in the Section 1022(b)(2) Analysis, the 
providers that use arbitration agreements will 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.\1278\ 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 
entity'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 entities that use arbitration agreements.
---------------------------------------------------------------------------

    \1278\ 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 consumer 
financial services providers who become parties to existing contracts 
with pre-dispute arbitration agreements that do not contain the 
required language would be

[[Page 33424]]

subject to the ongoing requirements of Sec.  1040.4(a)(2), which will 
require them to issue contract amendments or notices when they 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 will also be 
minimal since many of these providers typically send out notices for 
FDCPA purposes to consumers whose contracts these providers just 
acquired.
    The final 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 identified in the markets covered by 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 frequent repeat players.\1279\ 
Each instance of reporting consists of sending the Bureau already 
existing documents, potentially redacting specified categories of 
personally identifiable information pursuant to the final rule. As 
discussed above, the Bureau believes that fulfilling the requirement 
would not require any specialized skills and would require minimal 
time.
---------------------------------------------------------------------------

    \1279\ See Study, supra note 3, section 5 at 59.
---------------------------------------------------------------------------

    The Bureau requested comment on whether there are any additional 
costs or skills required to comply with reporting, recordkeeping, and 
other compliance requirements of the proposal that the Bureau had not 
mentioned in the IRFA. Although a number of commenters discussed the 
reporting, recordkeeping, and other compliance requirements of the 
proposal, as discussed in the Bureau's Section 1022(b)(2) Analysis 
above and the Bureau's PRA analysis below, none stated that there were 
additional costs or skills required beyond those described above. As 
noted in its Section 1022(b)(2) Analysis above, the Bureau believes 
that the vast majority of the final 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, including 
foregone profit from products or services that might lead to class 
action exposure. 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.
    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,\1280\ the Bureau 
estimates that the final rule will 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 fees, and an additional $1 million for defendant's attorney 
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. This 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.
---------------------------------------------------------------------------

    \1280\ 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 likely classified as large, 
and other debt collectors that were not SBA small at the time of the 
settlement were likely 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 at 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 will 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 than $200. However, the vast majority of 
the 51,000 providers will not experience any of these effects.
    As discussed above, these entities will also face increased 
exposure to State class litigation. While the Study's Section 6 
reported 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 final rule will not have a significant 
economic impact on a substantial number of small entities within the 
meaning of the RFA.
    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 will 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

[[Page 33425]]

able to invoke the agreements successfully.

6. Description of the Steps the Agency Has Taken To Minimize the 
Significant Economic Impact on Small Entities

    The Bureau described several potential alternatives above in the 
Section 1022(b)(2) Analysis. For the reasons discussed above, 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. The Bureau discussed these 
alternatives both for SBA small providers and for larger providers as 
well. In addition to the general alternatives discussed above, the 
Bureau further considered an exemption for small entities, which the 
Bureau discusses here. In the proposal, the Bureau requested comment on 
whether to exempt smaller entities from the rule, including comment on 
how to structure any such exemption, and received a number of comments 
both for and against such an exemption.
    A small business advocacy organization stated that the Bureau 
should exclude all small businesses from the class rule because, in its 
view, data concerning defense costs outlined in the SBREFA Report 
\1281\ demonstrates that it is particularly costly for a small business 
to defend a class action lawsuit, even when the small business has not 
violated the law, and the Bureau has not adduced data to demonstrate 
that small entities are under-complying with the law. The commenter 
also noted observations by small businesses that they have greater 
incentives to comply with laws due to a greater need to retain 
customers.\1282\
---------------------------------------------------------------------------

    \1281\ The commenter noted, for example, that SERs estimated it 
costs between $15,000 and $50,000 to defend a class action, that 
employee time is diverted, and business reputation can suffer, even 
when the company has done nothing wrong. See SBREFA Report, supra 
note 419, at 18-19 and appendix A.
    \1282\ Id. at 34.
---------------------------------------------------------------------------

    Two credit union and community bank industry commenters also urged 
an exemption from the class rule for depository institutions with $10 
billion or less in assets. In their view, the duty to consider the 
impact on these institutions under Dodd-Frank section 1022(b)(2)(A)(ii) 
feeds into the criteria for considering total assets of an institution 
for purposes of an exemption under Dodd-Frank section 1022(b)(3). These 
commenters stated that, in their view, institutions of this size are 
less likely to harm customers because of their relationship-based 
business model, and added that they are not subject to Bureau 
supervision or enforcement under Dodd-Frank. They further stated that 
institutions of this size have little choice but to settle class 
actions filed against them, because they cannot afford high attorney's 
fees and fear the imposition of crippling statutory damages on a 
classwide basis. Credit union industry commenters also emphasized that 
because credit unions are member owned, such costs also are passed on 
them not only as customers, but also in their capacity as owners. One 
credit union industry commenter also stated that exposure to class 
actions can lead smaller depository institutions to curtail product and 
service offerings. Finally, one community banking industry commenter 
stated that an exemption for smaller depository institutions should be 
adopted, since these are the institutions that are supervised and have 
ongoing customer relationships with incentives to treat customers 
fairly and, unlike certain nonbank markets such as payday lending, 
these institutions are not saturated already with arbitration 
agreements.
    A consumer advocate urged against a small entity exemption because, 
in its view, an exemption would encourage businesses to structure their 
operations to avoid coverage under the class rule.
    Considering the comments received and its own analysis and 
experience, the Bureau concludes that an exemption to the class rule 
for small entities would not reduce burden by any significant degree 
for most of the over 50,000 small entities covered by the rule because 
their burden is already relatively low given their low exposure to 
class actions. The Bureau is also concerned that such an exemption 
would potentially create significant unintended market distortions. Of 
course, any exemption to the class rule would reduce burden by allowing 
the exempted providers to shield themselves from class action 
liability. However, the Bureau has found that the rule is for the 
benefit of consumers and is in the public interest even after factoring 
in the costs that would be associated with the rule (see Part VI). In 
light of these findings, and the nature of the costs and benefits of 
the class rule, the Bureau evaluated a potential exemption to the class 
rule for small entities by considering whether such entities will be 
disproportionately burdened by the rule, compared to large 
entities.\1283\
---------------------------------------------------------------------------

    \1283\ In general, an exemption for small entities to a 
regulation might be justified if the benefits of applying a rule to 
small entities were disproportionately smaller. In the case of the 
class rule, the costs and benefits are inextricably linked, as the 
burden of class action exposure provides the primary benefit of the 
rule--deterrence.
---------------------------------------------------------------------------

    The Bureau believes that the burden to small entities from the rule 
will be smaller relative to their size than the burden to larger 
providers. First, the Bureau estimated in the proposal that the vast 
majority of new class actions against small entities filed per year due 
to the class rule would be filed against small debt collectors.\1284\ 
The Bureau notes that an exemption for small entities would not 
necessarily provide a reduction in burden for small debt collectors. 
Debt collectors and other service providers such as payment processors 
typically do not enter into arbitration agreements with consumers, but 
instead rely upon agreements made by the original creditor. Thus, 
unless small debt collectors work only for small creditors, a small 
entity exemption would not necessarily benefit such debt collectors 
absent a special rule allowing small debt collectors to invoke a large 
creditor's arbitration clause to block a class action even though the 
creditor itself, or its larger service providers, could not. The Bureau 
believes that large firms' arbitration agreements should not have a 
loophole that allows small service providers to avoid the rule. To do 
otherwise would distort incentives in the marketplace, as large firms 
could outsource potential sources of liability to small subcontractors. 
Therefore, the Bureau believes that there is no way to exempt small 
debt collectors without creating a market distortion that undermines 
the goals of the rule.
---------------------------------------------------------------------------

    \1284\ As discussed above, the Bureau estimated the number of 
additional class actions for small entities using the same 
methodology as was used in its Section 1022(b)(2) Analysis. That is, 
the rate of class action settlements with small entities in the 
Study was assumed to be the same for firms with arbitration 
agreements. Because few class actions in the Study were filed 
against small entities who were not debt collectors, the Bureau 
correspondingly estimated few additional cases against these 
entities due to the proposal. The underlying low rate of class 
actions against small entities may reflect better practices of these 
entities, or reduced incentives by class counsel to bring cases, or 
some combination.
---------------------------------------------------------------------------

    At the same time, in the proposal the Bureau estimated just three 
additional Federal class action settlements per year against small 
entities that are not debt collectors. Assuming the same number of 
State class action settlements, and four times more class actions that 
do not settle on a class basis, this would mean 30 cases filed against 
the roughly 45,000 small entities that are not debt collectors. By 
comparison, the Bureau estimated that there would be 22 additional 
Federal class action settlements against small debt

[[Page 33426]]

collectors, the same number of State class action settlements and four 
times more cases that are not settled on a class basis. This would mean 
220 total Federal and State Class actions filed against about 4,300 
small debt collectors.
    Based on the Bureau's estimate of 30 additional Federal and State 
class action cases against roughly 45,000 small non-debt collectors, 
all else being equal (and the Bureau does not assume that is the case), 
there is only a 1-in-1,500 chance that any given firm would face an 
additional class action lawsuit each year. This is substantially lower 
than the risk for large firms that are not debt collectors. The Bureau 
estimates that there are 1,740 firms affected by the rule that are not 
small and that are not debt collectors, and that there would be roughly 
560 additional putative Federal and State class actions lawsuits filed 
against these firms in a typical year, or a roughly 1-in-3 annual risk 
of an additional putative class action lawsuit.\1285\
---------------------------------------------------------------------------

    \1285\ The number of additional cases for large entities follows 
from the Bureau's estimates in table 1, in the Section 1022(b)(2) 
Analysis above, and the firm counts presented in table 3. The Bureau 
estimated there that there would be 514 additional class action 
settlements across all industries over a five-year period. Deducting 
the 264 settlements affecting debt collectors and then dividing by 
five yields 50 cases. Deducting the three cases affecting small 
entities leaves 47 class settlements. With the Bureau's assumption 
of five times more cases settled on an individual basis, this makes 
282 total putative Federal class cases. Assuming an equal number of 
putative State class cases yields 564.
---------------------------------------------------------------------------

    The Bureau acknowledges that, as some commenters and SBREFA 
participants asserted, it may be that the occurrence of a class action 
lawsuit harms small entities more than large ones. Although damage 
claims and payments to consumers are presumably a direct function of a 
firm's size in most cases, those few small entities that do face a 
lawsuit could feel a greater impact than any given large business that 
faces such a suit given that there are likely fixed costs to defending 
a class action lawsuit (i.e., the time it takes to resolve a class 
action costs a certain amount in defense costs). Small entities could 
have fewer cash reserves to pay a judgement, or as commenters 
suggested, small entities may be more likely to settle because they do 
not have the resources to fight the class action.\1286\ Nevertheless, 
to the extent this is true, the Bureau believes it is unlikely that 
small entities on net would have greater expected costs from the class 
rule than large entities. For this to be true, the cost to small 
entities from defending a class action would have to be not just 
larger, but large enough to account for the difference between the 1-
in-1,500 annual risk of a new class action for small entities and the 
1-in-3 annual risk for larger entities, or 500 times larger.
---------------------------------------------------------------------------

    \1286\ As noted in Part VI above, courts can take into account 
the financial condition of the defendant both in approving 
settlements and imposing judgements. Thus, it is unlikely that a 
firm would actually become bankrupt as a result of a putative class 
action.
---------------------------------------------------------------------------

    Considering the facts available to it, the Bureau does not believe 
the differences in burden justify an exemption for small entities. In 
addition, the Bureau has other concerns regarding the small entity 
exemption suggested by commenters.
    First, the risk of a class action lawsuit, while relatively low for 
small entities, will nonetheless provide a measure of deterrence. In 
particular, small entities with poor compliance practices are more 
likely to be the target of a class action, but might continue their 
poor practices or reduce compliance further if shielded from class 
action liability. Moreover, as discussed above in Parts VI and VIII, 
due to resource constraints, regulators will tend to prioritize public 
enforcement actions against violations of the law with larger aggregate 
harms. To the extent that this entails targeting larger entities, this 
potentially leaves class actions as the only feasible means of redress 
for customers of small entities that violate the law. At the same time, 
the Bureau believes that consumers have no effective means of avoiding 
the increased risk of harm that a small entity exemption would create 
when dealing with small providers. The size of particular institutions 
and their affiliates is not generally a matter of public record let 
alone known to individual consumers and the Study showed consumers 
already do not take arbitration agreements into account when selecting 
providers. Thus, consumers would have little means to avoid the greater 
risks they may be exposed to by small providers who are not covered by 
the rule.
    Second, the Bureau also is concerned with the potential for market 
distortions or unfair or potentially arbitrary distinctions that a 
small entity exemption could create for market participants. The Bureau 
does not agree with the community bank industry commenter that 
suggested it would be appropriate to exempt smaller depository 
institutions even if the Bureau does not exempt providers of the same 
products who are nonbanks. Such differential exposure to legal risk 
based on the same conduct could create market distortions of the sort 
that the Bureau is charged with minimizing.
    Third, even if all types of market participants were eligible for a 
small exemption, any such exemption still would be problematic. The 
Bureau believes that fashioning an appropriate threshold for a small-
entity exemption would impose substantial complexity, particularly 
around how such a threshold would address the various markets covered 
by the final rule. As noted, other than a request for a threshold 
specific to depository institutions, the Bureau received no comments on 
how to adopt a broad threshold that could apply to providers that 
provide multiple different types of products and services only some of 
which are covered by the rule and with a variety of corporate 
structures. Furthermore, the Bureau is concerned that any threshold 
would be difficult to apply to small entities that are service 
providers to larger entities. In addition, complex legal questions 
would arise in situations in which a provider crossed over or dropped 
under the threshold after the rule takes effect.
    Finally, with regard to the member-ownership structure of credit 
unions, the Bureau does not believe that issue pertains to the size of 
the credit union. Therefore, the concern expressed by commenters that 
credit unions already have sufficient incentives for compliance does 
not seem relevant to the specific issue of a potential small entity 
exemption.

7. Description of the Steps the Agency Has Taken To Minimize Any 
Additional Cost of Credit for Small Entities

    Although SERs expressed concern that the proposal 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 will not be impacted by the 
final rule. The Bureau did not receive any comments on this subject in 
response to the proposal. Although the Bureau estimates a higher 
likelihood that a smaller debt collector would be subject to 
incremental class litigation at any given time, most of these entities 
are already subject to class litigation due to the fact that they may 
or may not be able to rely on an arbitration agreement from their 
clients. As such, the Bureau believes it is unlikely that these firms 
will experience an adverse impact on their cost of credit. In any 
event, the Study indicated that the majority of cases filed as class 
actions are resolved within a few months, such that any adverse impact 
is likely to be only temporary.
    As noted in the SBREFA Report, SERs expressed concerns about how 
the

[[Page 33427]]

proposals under consideration would affect their borrowing costs. 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.

X. Paperwork Reduction Act

    Under the Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3501 et 
seq.), Federal agencies are generally required to seek the Office of 
Management and Budget (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. OMB has tentatively assigned control #3170-0064 to these 
collections of information, however this control number is not yet 
active.
    This final rule contains information collection requirements that 
have not yet been approved by the OMB and, therefore, are not effective 
until OMB approval is obtained. The unapproved information collection 
requirements are listed below. A complete description of the 
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.
    The Bureau believes that this final rule will 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.\1287\
---------------------------------------------------------------------------

    \1287\ See Sec.  1040.5(a).
---------------------------------------------------------------------------

    The first information collection requirement relates to disclosure 
requirements. The final rule will 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.\1288\ 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.\1289\ The Bureau proposed 
this language and providers will be required to use it unless an 
enumerated exception applies. The Bureau will also 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 final rule.\1290\ The Bureau will further permit 
providers to include optional adjustments to these provisions, where 
applicable.\1291\
---------------------------------------------------------------------------

    \1288\ See 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 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.
    \1289\ See Sec.  1040.4(a)(2)(i).
    \1290\ See Sec.  1040.4(a)(2)(ii).
    \1291\ See Sec.  1040.4(a)(2)(iv)-(vi).
---------------------------------------------------------------------------

    The final 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),\1292\ and the 
agreement does not already contain the provision required by 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.\1293\ Under the second exception, the requirement to 
ensure that an arbitration agreement entered into after the compliance 
date contains the provision required by Sec.  1040.4(a)(2)(i) (or the 
alternative provision permitted by Sec.  1040.4(a)(2)(ii)) will 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 Sec.  1040.4(a)(2) by providing an amended arbitration agreement to 
the consumer.\1294\
---------------------------------------------------------------------------

    \1292\ See comment 4(a)(2)-2 for an example of when this could 
occur.
    \1293\ See Sec.  1040.4(a)(2)(iii).
    \1294\ See Sec.  1040.5(b).
---------------------------------------------------------------------------

    The second information collection requirement relates to reporting 
requirements. The provision will require providers to submit specified 
arbitral and court records to the Bureau relating to any arbitration 
agreement entered into after the compliance date.\1295\ The rule will 
require the submission of three general categories of documents to the 
Bureau. The first category will require providers to submit any 
submission to a court that relies upon an arbitration agreement in 
support of the provider's attempt to seek dismissal, deferral, or stay 
of a case.\1296\ The second category will 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 will be required to submit the 
following four types of documents in connection with any claim filed in 
arbitration: (A) The initial claim and any counterclaim; (B) the answer 
to any initial claim and/or counterclaim, if any; (C) the arbitration 
agreement filed with the arbitrator or arbitration administrator; (D) 
the judgment or award, if any, issued by the arbitrator or arbitration 
administrator; and (E) 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.\1297\ The third 
category will 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 
final rule does not comply with the administrator's fairness 
principles, rules, or similar requirements.\1298\
---------------------------------------------------------------------------

    \1295\ See Sec.  1040.4(b).
    \1296\ See Sec.  1040.4(b)(1)(iii).
    \1297\ See Sec.  1040.4(b)(1)(i).
    \1298\ See Sec.  1040.4(b)(1)(ii).
---------------------------------------------------------------------------

    The Bureau received no comments specifically addressing the PRA 
notice, although some industry commenters made general comments 
regarding the expected burden of the proposal, including burdens 
accounted for in the PRA. As explained in detail in the Supporting 
Statement filed with this rule and available at Regulations.gov or 
Reginfo.gov, the Bureau believes that the burden estimates contained in 
the Supporting Statement with the ICR that the Bureau has submitted to 
OMB under the requirements of the PRA are sufficiently conservative, 
such that even if all of the assertions of the commenters

[[Page 33428]]

were entirely supported by data, they would still point to a burden 
less than or equal to the Bureau's estimates.
    Pursuant to 44 U.S.C. 3507, the Bureau will publish a separate 
notice in the Federal Register announcing the submission of this these 
information collection requirements to OMB as well as OMB's action on 
this these submissions, including the OMB control number and expiration 
date.
    The Bureau has a continuing interest in the public's opinion of its 
collections of information. At any time, comments regarding the burden 
estimate, or any other aspect of the information collection, including 
suggestions for reducing the burden, may be sent to the Consumer 
Financial Protection Bureau (Attention: PRA Office), 1700 G Street NW., 
Washington, DC 20552, or by email to [email protected].

List of Subjects in 12 CFR 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

0
For the reasons set forth above, the Bureau adds 12 CFR 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 and purpose.
1040.2 Definitions.
1040.3 Coverage and exclusions from 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 and purpose.

    (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 Wall Street Reform and 
Consumer Protection Act (Dodd-Frank Act) (12 U.S.C. 5512(b)(1) and (c) 
and 5518(b)).
    (b) Purpose. The purposes of this part are 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, and also 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.


Sec.  1040.2  Definitions.

    (a) Class action means a lawsuit in which one or more parties seek 
or obtain 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) Pre-dispute arbitration agreement means an agreement between a 
covered person as defined by 12 U.S.C. 5481(6) and a consumer providing 
for arbitration of any future dispute concerning a consumer financial 
product or service covered by Sec.  1040.3(a).
    (d) Provider means:
    (1) A person as defined by 12 U.S.C. 5481(19) that engages in an 
activity covered by Sec.  1040.3(a) to the extent that the person is 
not excluded under Sec.  1040.3(b); or
    (2) An affiliate of a provider as defined in paragraph (d)(1) of 
this section when that affiliate is acting as a service provider to the 
provider with which the service provider is affiliated consistent with 
12 U.S.C. 5481(6)(B).


Sec.  1040.3  Coverage and exclusions from coverage.

    (a) Covered products and services. Except for persons when excluded 
from coverage pursuant to paragraph (b) of this section, this part 
applies to the offering or provision of the following products or 
services when such offering or provision is a consumer financial 
product or service as defined by 12 U.S.C. 5481(5):
    (1)(i) Providing an ``extension of credit'' that is ``consumer 
credit'' when performed by a ``creditor'' as those terms are defined in 
Regulation B, 12 CFR 1002.2;
    (ii) ``Participat[ing] in [ ] credit decision[s]'' within the 
meaning of 12 CFR 1002.2(l) when performed by a ``creditor'' with 
regard to ``consumer credit'' as those terms are defined in 12 CFR 
1002.2;
    (iii)(A) Referring applicants or prospective applicants for 
``consumer credit'' to creditors when performed by a ``creditor'' as 
those terms are defined in 12 CFR 1002.2; or
    (B) Selecting or offering to select creditors to whom requests for 
``consumer credit'' may be made when done by a ``creditor'' as those 
terms are defined in 12 CFR 1002.2;
    (C) Except that this paragraph (a)(1)(iii) does not apply when the 
referral or selection activity by the creditor described in paragraphs 
(a)(1)(iii)(A) or (B) of this section is incidental to a business 
activity of that creditor that is not covered by this section;
    (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;
    (2) Extending automobile leases as defined by 12 CFR 1090.108 or 
brokering such leases;
    (3)(i) 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;
    (ii) Providing products or services represented to remove 
derogatory information from, or improve, a person's credit history, 
credit record, or credit rating;
    (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, 
as defined by 15 U.S.C. 1681g(f)(2)(A), or other information specific 
to a consumer derived from a consumer file, as defined by 15 U.S.C. 
1681a(g), in each case except for a consumer report provided solely in 
connection with an adverse action as defined in 15 U.S.C. 1681a(k) with 
respect to a product or service that is not covered by 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 12 U.S.C. 
5481(29) except when necessary to another product or service if that 
product or service:
    (i) Is offered or provided by the person transmitting or exchanging 
funds; and
    (ii) 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 12 U.S.C. 5481(18) or initiating a credit card or charge 
card transaction for the consumer, except by a person selling or 
marketing a good or service that is not

[[Page 33429]]

covered by this section, for which the payment or credit card or charge 
card transaction is being made;
    (9) Providing 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 when performed 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 in the following circumstances:
    (1)(i) A person regulated by the Securities and Exchange Commission 
as defined by 12 U.S.C. 5481(21); or
    (ii) A person to the extent regulated by a State securities 
commission as described in 12 U.S.C. 5517(h) as either:
    (A) A broker dealer; or
    (B) An investment adviser; or
    (iii) A person regulated by the Commodity Futures Trading 
Commission as defined by 12 U.S.C. 5481(20) or a person with respect to 
any account, contract, agreement, or transaction to the extent subject 
to the jurisdiction of the Commodity Futures Trading Commission under 
the Commodity Exchange Act, 7 U.S.C. 1 et seq.
    (2)(i) A Federal agency as defined in 28 U.S.C. 2671;
    (ii) Any State, Tribe, or other person to the extent such person 
qualifies as an ``arm'' of a State or Tribe under Federal sovereign 
immunity law and the person's immunities have not been abrogated by the 
U.S. Congress;
    (3) Any person with respect to 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) A merchant, retailer, or other seller of nonfinancial goods or 
services to the extent such person:
    (i) Offers or provides 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
    (A) Is not subject to the Bureau's rulemaking authority under 12 
U.S.C. 5517(a)(2)(B); or
    (B) Is subject to the Bureau's rulemaking 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) Purchases or acquires an extension of consumer credit excluded 
by paragraph (b)(4)(i) of this section.
    (5) Any ``employer'' as defined in the Fair Labor Standards Act, 29 
U.S.C. 203(d), to the extent it is offering or providing a product or 
service described in paragraph (a) of this section to its employee as 
an employee benefit; or
    (6) A person to the extent providing a product or service in 
circumstances where they are excluded from the Bureau's rulemaking 
authority including pursuant to 12 U.S.C. 5517 or 5519.


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 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 concerns 
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 such review has been resolved such that the 
case cannot proceed as a class action.
    (2) Provision required in covered pre-dispute arbitration 
agreements. Upon entering into a pre-dispute arbitration agreement for 
a consumer financial product or service covered by Sec.  1040.3 after 
the date set forth in Sec.  1040.5(a):
    (i) Except as provided elsewhere in this paragraph (a)(2) or in 
Sec.  1040.5(b), a provider shall ensure that any such pre-dispute 
arbitration agreement contains the following provision: ``We agree that 
neither we nor anyone else will rely on 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 filed by someone 
else.''
    (ii) When the pre-dispute arbitration agreement applies to 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 required by paragraph (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. The following provision applies only to 
class action claims concerning the products or services covered by that 
Rule: We agree that neither we nor anyone else will rely on 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 filed by someone else.''
    (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:
    (A) The provider shall either ensure the pre-dispute arbitration 
agreement is amended to contain the provision specified in paragraph 
(a)(2)(i) or (a)(2)(ii) of this section or provide any consumer to whom 
the agreement applies with the following written notice: ``We agree not 
to rely on 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 filed by someone else.'' 
When the pre-dispute arbitration agreement applies to multiple products 
or services, only some of which are covered by Sec.  1040.3, the 
provider may, in this written notice, include the following optional 
additional language: ``This notice applies only to class action claims 
concerning the products or services covered by the Arbitration 
Agreements Rule issued by the Consumer Financial Protection Bureau.''
    (B) The provider shall ensure the pre-dispute arbitration agreement 
is amended or provide the notice to consumers within 60 days of 
entering into the pre-dispute arbitration agreement.
    (iv) A provider may add any one or more of the following sentences 
at the end of the disclosures required by paragraphs (a)(2)(i) and (ii) 
of this section:
    (A)(1) ``This provision does not apply to parties that entered into 
this agreement before March 19, 2018.''
    (2) ``This provision does not apply to products or services first 
provided to you before March 19, 2018 that are subject to an 
arbitration agreement entered into before that date.''
    (B) ``This provision does not apply to persons that are excluded 
from the Consumer Financial Protection Bureau's Arbitration Agreements 
Rule.''
    (C) ``This provision also applies to the delegation provision.'' A 
provider using

[[Page 33430]]

this sentence as part of the disclosure required by paragraph (a)(2)(i) 
or (ii) of this section in a pre-dispute arbitration agreement is not 
required to separately insert the disclosure required by paragraph 
(a)(2)(i) or (ii) of this section into a delegation provision that 
relates to such a pre-dispute arbitration agreement.
    (v) In any provision or notice required by this paragraph (a)(2), 
if the provider uses a standard term in the rest of the agreement to 
describe the provider or the consumer, the provider may use that term 
instead of the term ``we'' or ``you.''
    (vi) In any provision or notice required by this paragraph (a)(2), 
if a person has a genuine belief that sovereign immunity from suit 
under applicable law may apply to any person that may seek to assert 
the pre-dispute arbitration agreement, then the provision or notice may 
include, after the sentence reading ``You may file a class action in 
court or you may be a member of a class action filed by someone else,'' 
the following language: ``However, the defendants in the class action 
may claim they cannot be sued due to their sovereign immunity. This 
provision does not create or waive any such immunity.'' In the 
preceding sentence, the word ``notice'' may be substituted for the word 
``provision'' when the included language is in a notice.
    (vii) A provider may provide any provision or notice required by 
this paragraph (a)(2) in a language other than English if the pre-
dispute arbitration agreement also is written in that other language.
    (b) Submission of arbitral and court records. For any pre-dispute 
arbitration agreement for a consumer financial product or service 
covered by Sec.  1040.3 entered into after the date set forth in Sec.  
1040.5(a), a provider shall comply with the requirements set forth 
below.
    (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 answer to any initial claim and/or counterclaim, if any;
    (C) The pre-dispute arbitration agreement filed with the arbitrator 
or arbitration administrator;
    (D) The judgment or award, if any, issued by the arbitrator or 
arbitration administrator; and
    (E) 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;
    (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; and
    (iii) In connection with any case in court by or against the 
provider concerning any of the consumer financial products or services 
covered by Sec.  1040.3:
    (A) Any submission to a court that relies on a pre-dispute 
arbitration agreement in support of the provider's attempt to seek 
dismissal, deferral, or stay of any aspect of a case; and
    (B) The pre-dispute arbitration agreement relied upon in the motion 
or filing.
    (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, 
arbitration administrator, or court, 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, the court, 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.
    (4) Internet posting of arbitral and court records. The Bureau 
shall establish and maintain on its publicly available internet site a 
central repository of the records that providers submit to it pursuant 
to paragraph (b)(1) of this section, and such records shall be easily 
accessible and retrievable by the public on its internet site.
    (5) Further redaction prior to Internet posting. Prior to making 
records identified in paragraph (b)(1) of this section easily 
accessible and retrievable by the public as required by paragraph 
(b)(4) of this section, the Bureau shall make such further redactions 
as are needed to comply with applicable privacy laws.
    (6) Deadline for internet posting of arbitral and court records. 
The Bureau shall initially make records submitted to the Bureau by 
providers under paragraph (b)(1) of this section easily accessible and 
retrievable by the public on its internet site no later than July 1, 
2019. The Bureau will annually make records submitted under paragraph 
(b)(1) available each year thereafter for documents received by the end 
of the prior calendar year.


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 on or after March 19, 
2018.
    (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 
paragraphs (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 
the compliance date of the rule.
    (2) For a provider that has the ability to contact the consumer in 
writing:
    (i) The requirements set forth in paragraphs (b)(1)(i) through 
(iii) of this section are satisfied; 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.

[[Page 33431]]

Supplement I to Part 1040--Official Interpretations

Section 1040.2--Definitions

    2(c) Pre-dispute arbitration agreement.
    1. Scope of the term includes agreements with covered persons 
that are not providers.
    i. While Sec.  1040.2(c) defines ``pre-dispute arbitration 
agreement'' as an agreement between a covered person and a consumer, 
the rule's substantive requirements, which are contained in Sec.  
1040.4, apply only to ``providers.'' ``Covered persons'' as that 
term is defined in 12 U.S.C. 5481(6) include persons excluded from 
the Bureau's rulemaking authority under 12 U.S.C. 5517 and 5519. 
Therefore, the requirements contained in Sec.  1040.4 would not 
apply to any such excluded persons entering into a pre-dispute 
arbitration agreement because they are not ``providers,'' by virtue 
of the definition in Sec.  1040.2(d) which excludes persons 
described in Sec.  1040.3(b) including its paragraph (b)(6) (under 
which any person is excluded under Sec.  1040.3(b) to the extent it 
is not subject to the Bureau's rulemaking authority including under 
sections 1027 or 1029). The requirements in Sec.  1040.4 could 
apply, however, to the use of any such pre-dispute arbitration 
agreement by a different person that meets the definition of 
provider in Sec.  1040.2(d), when the pre-dispute arbitration 
agreement was entered into after the compliance date.
    ii. For example, an automobile dealer that extends consumer 
credit is a covered person under 12 U.S.C. 5481(6). Its pre-dispute 
arbitration agreement would therefore fall within the scope of the 
definition in Sec.  1040.2(c). However, an automobile dealer 
excluded from the Bureau's rulemaking authority in circumstances 
described by Dodd-Frank section 1029 would not be required to comply 
with the requirements in Sec.  1040.4, because those requirements 
apply only to providers, and such dealers are excluded by Sec.  
1040.3(b)(6) and therefore are not providers under Sec.  1040.2(d). 
The requirements in Sec.  1040.4 would apply, however, to the use of 
the automobile dealer's pre-dispute arbitration agreement by a 
different person that meets the definition of provider, such as a 
servicer or purchaser or acquirer of the automobile loan, when the 
agreement was entered into after the compliance date.
    2. Delegation provisions. The term pre-dispute arbitration 
agreement as defined in Sec.  1040.2(c) includes delegation 
provisions. Delegation provisions are agreements to arbitrate 
threshold issues concerning a pre-dispute arbitration agreement, and 
may sometimes appear elsewhere in a contract containing or relating 
to the arbitration agreement.
    3. Form of pre-dispute arbitration agreements. A pre-dispute 
arbitration agreement for a consumer financial product or service 
includes any agreement between a covered person and a consumer 
providing for arbitration of any future disputes between the parties 
concerning a consumer financial product or service described in 
Sec.  1040.3(a), regardless of the form or structure of the 
agreement. 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.
    2(d) Provider.
    1. Providers of multiple products or services. A provider as 
defined in Sec.  1040.2(d) 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 as a general 
service, when that funds transmittal activity is not necessary to 
its offering or provision of products or services that are not 
covered by this part, would be covered pursuant to Sec.  
1040.3(a)(7) 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, however, except when extending consumer 
credit in certain circumstances as provided in 12 U.S.C. 
5517(a)(2)(B)(ii) or (iii).
    2. Affiliated service providers. Section 1040.2(d)(2) defines 
the term ``provider'' to include an affiliate of another provider as 
defined in Sec.  1040.2(d)(1) when the affiliate is acting as a 
service provider to the other provider consistent with 12 U.S.C. 
5481(6)(B). The rule applies to such an affiliated service provider 
in connection with the offering or provision of a covered consumer 
financial product or service by the other provider, even when the 
affiliated service provider is not itself directly engaged in 
offering or providing a consumer financial product or service 
covered by Sec.  1040.3(a). However, even if an affiliated service 
provider does not meet the definition of provider in Sec.  
1040.2(d)(2) because it provides services to a person who is 
excluded from the rule under Sec.  1040.3(b) and thus is not a 
provider, the affiliated service provider still could be a provider 
as defined in Sec.  1040.2(d)(1). For example, if an affiliate of a 
merchant excluded by Sec.  1040.3(b)(6) services consumer credit 
extended by the merchant, the affiliate may, in its own right, be 
``servicing an extension of consumer credit covered by paragraph 
(a)(1)(i) of this section'' as discussed in Sec.  1040.3(a)(1)(v). 
As a result, the affiliate servicer may meet the definition of 
provider in Sec.  1040.2(d)(1) even though the merchant is not a 
provider.

Section 1040.3--Coverage and Exclusions From Coverage

    3(a) Covered products and 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 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 the first type of consumer 
financial products or services. An example of the second type of 
consumer financial product or service is debt collection, when the 
underlying loan that is the subject of collection is a consumer 
financial product or service.
    2. Mobile phone applications and online access tools. If a 
provider of a consumer financial product or service covered by this 
part offers or provides a consumer a technological means for 
accessing information about that product or service, such as a 
mobile phone application or an internet Web site, this part shall 
apply to the application or internet Web site as it concerns that 
product or service.
    Paragraph (a)(1)(iii).
    1. Offering or providing creditor referral or selection 
services. Section 1040.3(a)(1)(iii) includes in the coverage of part 
1040 providing referrals or selecting or offering to select 
creditors for consumer credit consistent with the meaning in 12 CFR 
1002.2(l) by a creditor as defined in 12 CFR 1002.2(l). Section 
1040.3(a)(1)(iii) does not apply when such a creditor's referral or 
selection activity is incidental to its business activity not 
covered by this section. See Sec.  1040.3(a)(1)(iii)(C). For 
example, a merchant may regularly and in the ordinary course of its 
business provide creditor referrals or selection services to help a 
consumer pay for nonfinancial goods or services sold by that 
merchant. By virtue of such activities, such a merchant may be a 
creditor as defined in 12 CFR 1002.2(l). Nonetheless, such a 
merchant would not be covered by Sec.  1040.3(a)(1)(iii) because its 
creditor referral or selection services are incidental to its sale 
of goods or services not covered by this section.
    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 
covered by Sec.  1040.3(a)(1)(i). 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)(i).
    1. Debt relief products and services. Section 1040.3(a)(3)(i) 
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)(i) 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)(3)(ii).
    1. Credit repair products or services. Section 1040.3(a)(3)(ii) 
includes in the coverage of part 1040 products or services 
represented to remove derogatory information from, or improve, a 
person's credit history, credit record, or credit rating. The 
description of these products and services in Sec.  1040.3(a)(3)(ii) 
is generally based upon the coverage of credit repair goods or 
services in regulations implementing 15 U.S.C. 6101 et seq., 
codified at 16 CFR 310.4(a)(2). However, part 1040 also would apply 
even if such credit repair

[[Page 33432]]

goods or services would not be covered under the regulations 
implementing 15 U.S.C. 6101 et seq., codified at 16 CFR 310.4(a)(2), 
solely because they were not the subject of telemarketing as defined 
in 16 CFR 310.2(gg).
    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 noncovered 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)(2)(ii).
    1. Exclusion for States under Federal sovereign immunity law. 
Section 1043.3(b)(2)(ii) excludes States and other persons to the 
extent they would be an arm of the State under Federal sovereign 
immunity law and their immunity has not been abrogated by the U.S. 
Congress. For purposes of this rule, the term State includes any 
State, territory, or possession of the United States, the District 
of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of 
the Northern Mariana Islands, Guam, American Samoa, and the U.S. 
Virgin Islands.
    2. Exclusion for Tribes under Federal sovereign immunity law. 
Section 1040.3(b)(2)(ii) excludes Tribes and other persons to the 
extent that they would be an arm of a Tribe under Federal sovereign 
immunity law and their immunity has not been abrogated by the U.S. 
Congress. For purposes of this exclusion, the term ``Tribe'' refers 
to any federally recognized Indian Tribe, as defined by the 
Secretary of the Interior under section 104(a) of the Federally 
Recognized Indian Tribe List Act of 1994, 25 U.S.C. 479a-1(a).
    Paragraph (b)(3).
    1. Including consumers to whom affiliates provide a product or 
service toward the numerical threshold for exemption of a person 
under Sec.  1040.3(b)(3). Section 1040.3(b)(3) provides an exclusion 
to persons providing a product or service covered by Sec.  1040.3(a) 
if no more than 25 consumers are provided the product or service in 
the current and prior calendar years by the person and its 
affiliates. The exclusion applies based on the frequency with which 
the product is provided, regardless of the number of times a product 
is offered. Note, however, that participating in a credit decision 
with regard to consumer credit in circumstances described in Sec.  
1040.3(a)(1)(ii), for example, constitutes providing a product or 
service covered by Sec.  1040.3(a), even if an application for 
consumer credit is denied. In addition, for purposes of this test, 
the number of consumers to whom affiliates of a person provide a 
product or service is combined with the number of consumers to whom 
the person itself 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.
    2. Effect of exceeding the numerical threshold for the 
exemption. If, during a calendar year, a person to that point 
excluded by Sec.  1040.3(b)(3) for a given product or service 
described in Sec.  1040.3(a) provides that product or service to a 
26th consumer, then that person ceases to be eligible for this 
exclusion at that time with respect to that product or service. The 
provider must begin complying with this part with respect to the 
covered product or service provided to that 26th consumer. In 
addition, the provider will not be eligible for the exclusion in 
Sec.  1040.3(b)(3) whenever it offers or provides that product or 
service for the remainder of that calendar year and the following 
calendar year.
    Paragraph (b)(4).
    1. Exemption for merchants who purchase or acquire consumer 
credit from other merchants who are exempt. Section 1040.3(b)(4)(ii) 
provides an exemption for a merchant who purchases or acquires 
consumer credit from another merchant when the merchant from whom 
the credit is being purchased or acquired is exempt under Sec.  
1040.3(b)(4)(i). This exemption in Sec.  1040.3(b)(4)(ii) applies 
not only to the purchase or acquisition itself, but also to any 
servicing or collection activities by the merchant purchaser or 
acquirer.
    Paragraph (b)(5).
    1. Exemption for employers providing employee benefits. Section 
1040.3(b)(5) provides an exemption for an employer to the extent it 
is offering or providing a consumer financial product or service to 
an employee as an employee benefit. If an employer offers or 
provides a consumer financial product or service covered by Sec.  
1040.3(a) to an employee on terms and conditions that the employer 
makes available to the general public, such product or service is 
not an employee benefit for purposes of Sec.  1040.3(b)(5).

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

    1. Enters into a pre-dispute arbitration agreement.
    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, after the date set forth in Sec.  
1040.5(a), a new product or service covered by Sec.  1040.3(a) that 
is subject to a pre-existing agreement to arbitrate future disputes 
between the parties, and the provider is a party to that agreement, 
regardless of whether that agreement predates the date set forth in 
Sec.  1040.5(a). When that agreement predates the date set forth in 
Sec.  1040.5(a), Sec.  1040.4 applies only with respect to any such 
new product or service;
    B. Acquires or purchases after the date set forth in Sec.  
1040.5(a) a product or service 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 seller is 
excluded from coverage under Sec.  1040.3(b) or the pre-dispute 
arbitration agreement was entered into before the date set forth in 
Sec.  1040.5(a); or
    C. Adds a pre-dispute arbitration agreement after the date set 
forth in Sec.  1040.5(a) 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 
without engaging in the conduct described in comment 4-1.i after the 
date set forth in Sec.  1040.5(a). However, a provider does enter 
into a pre-dispute arbitration agreement for purposes of Sec.  
1040.4 when the modification, amendment, or implementation 
constitutes the provision of a new product or service. See comment 
4-1.i(A).
    B. Acquires or purchases a product or service that is subject to 
a pre-dispute arbitration agreement but does not become a party to 
the pre-dispute arbitration agreement that applies to the product or 
service.
    2. Application of section 1040.4 to providers that do not enter 
into pre-dispute arbitration agreements.
    i. Pursuant to Sec.  1040.4(a)(1), a provider that has not 
entered into a pre-dispute arbitration agreement cannot rely on any 
pre-dispute arbitration agreement entered into by another person 
after the compliance date specified in Sec.  1040.5(a) with respect 
to any aspect of a class action concerning a consumer financial 
product or service covered by Sec.  1040.3. In addition, pursuant to 
Sec.  1040.4(b), the provider is required to submit certain 
specified records concerning claims filed in arbitration pursuant to 
such pre-dispute arbitration agreements. However, as discussed in 
comment 4(a)(2)-1, 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

[[Page 33433]]

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 after the compliance date specified in 
Sec.  1040.5(a) with respect to any aspect of a class action filed 
against the debt collector concerning its debt collection products 
or services covered by section Sec.  1040.3. The debt collector in 
this example is subject to Sec.  1040.4(a)(1) even if the creditor 
was a merchant, government, or other person who was excluded from 
coverage by Sec.  1040.3(b)(5).
    4(a) Use of pre-dispute arbitration agreements in class actions.
    Paragraph 4(a)(1) General rule.
    1. Reliance on a pre-dispute arbitration agreement.
    i. Examples of conduct that constitutes reliance. Sections 
1040.4(a)(1) and (2) both use the term ``rely on.'' For purposes of 
these provisions, reliance on a pre-dispute arbitration agreement 
includes, but is not limited to, doing any of the following on the 
basis of a pre-dispute arbitration agreement:
    A. Seeking dismissal, deferral, or stay of any aspect of a class 
action;
    B. Seeking to exclude a person or persons from a class in a 
class action;
    C. Objecting to or seeking a protective order intended to avoid 
responding to discovery in a class action;
    D. Filing a claim in arbitration against a consumer who has 
filed a claim on the same issue in a class action;
    E. 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
    F. 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.
    ii. Example of conduct that does not constitute reliance. 
Reliance on a pre-dispute arbitration agreement for purposes of 
Sec.  1040.4(a)(1) and (2) does not include, among other things, a 
class action defendant seeking or taking steps to preserve the 
defendant's ability to seek arbitration after the trial court has 
denied a motion to certify the class and either an appellate court 
has affirmed that decision on an interlocutory appeal of that 
motion, or the time to seek such an appeal has elapsed.
    2. Protected petitioning conduct. A class action defendant does 
not violate Sec.  1040.4(a)(1) by relying on a pre-dispute 
arbitration agreement where it has a genuine belief that it is not 
subject to this part. For example, a class action defendant does not 
violate Sec.  1040.4(a)(1) by relying on a pre-dispute arbitration 
agreement where it has a genuine belief either that it is not 
covered by the rule because it is not a provider pursuant to Sec.  
1040.2(d), or that none of the claims asserted in the class action 
concern any of the consumer financial products or services covered 
pursuant to Sec.  1040.3.
    3. 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.
    Paragraph 4(a)(2) Required provision.
    1. Application of section 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 
after the compliance date set forth in Sec.  1040.5(a). 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.
    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) to ensure the agreement is amended to contain either of those 
provisions, as applicable, 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) or the 
alternative permitted by Sec.  1040.4(a)(2)(ii), or to provide the 
notice specified in Sec.  1040.4(a)(2)(iii)(B). 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. 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. Contract provision for a delegation provision. If a provider 
has included in its pre-dispute arbitration agreement the language 
required by Sec.  1040.4(a)(2), and the provider's pre-dispute 
arbitration agreement contains a delegation provision, the provider 
must also separately insert the language required by Sec.  
1040.4(a)(2) into the delegation provision, except under Sec.  
1040.4(a)(2)(iv)(C). Under Sec.  1040.4(a)(2)(iv)(C), the provider 
need not also include the language required by Sec.  1040.4(a)(2) 
within a separate delegation provision--the language can be included 
once and applies to both the pre-dispute arbitration agreement and 
the delegation provision.
    4(b) Submission of arbitral records.
    1. Submission by entities other than providers. Section 
1040.4(b) requires providers to submit specified arbitral and court 
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).
    2. 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).
    Paragraph 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. However, when the determination occurs with respect to a pre-
dispute arbitration agreement that the provider has not entered into 
with any consumers, 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

[[Page 33434]]

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.
    Paragraph 4(b)(1)(iii).
    1. Reliance on a pre-dispute arbitration agreement. Section 
1040.4(b)(1)(iii) requires that a provider shall submit to the 
Bureau certain submissions in court that rely on a pre-dispute 
arbitration agreement entered into after the compliance date set 
forth in Sec.  1040.5(a) with respect to certain aspects of a case 
concerning any of the consumer financial products or services 
covered by Sec.  1040.3.
    2. A submission does not rely on a pre-dispute arbitration 
agreement, for purposes of Sec.  1040(b)(1)(iii), if it:
    i. Objects to or seeks a protective order intended to avoid 
responding to discovery;
    ii. Is only referred to in an answer to a complaint or a 
counterclaim; or
    iii. Is only incidentally part of an attachment to a submission. 
For instance, if a motion attaches the entire consumer financial 
contract, including the pre-dispute arbitration agreement, but the 
motion does not cite or rely on the pre-dispute arbitration 
agreement, the provider is not required to submit the motion to the 
Bureau.

Section 1040.5--Compliance Date and Temporary Exception

    5(b) Exception for pre-packaged general-purpose reloadable 
prepaid card agreements.
    1. Application of Sec.  1040.4(a)(1) to providers of general-
purpose reloadable prepaid card agreements. Where Sec.  1040.4(a)(2) 
does not apply to a provider that enters into a pre-dispute 
arbitration agreement on or after the compliance date by virtue of 
the temporary exception in Sec.  1040.5(b)(2), the provider must 
still comply with Sec.  1040.4(a)(1).
    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 consumer registers the card and gives the provider the 
consumer's mailing address or email address.

    Dated: June 27, 2017.
Richard Cordray,
Director, Bureau of Consumer Financial Protection.
[FR Doc. 2017-14225 Filed 7-18-17; 8:45 am]
BILLING CODE 4810-AM-P