Pub. 6 2016-2017 Issue 1

O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S - H E L P I N G C O L O R A D A N S R E A L I Z E D R E A M S July • August 2016 15 • Extending or brokering certain automobile leases; • Providing services related to debt management or debt settlement; • Providing consumer reports directly to consumers; • Providing accounts under the Truth in Savings Act and accounts remittance transfers subject to the Electronic Fund Transfer Act; • Transmitting or exchanging funds (except when the transfer is integral to another product or service not covered by the proposed rule) or providing certain other payment processing services, check cashing, check col- lection, or check guaranty services; and • Collecting debt arising from any of the above products or services. The proposed rule contains a few limited exceptions, such as certain broker-dealers that are already covered by Securities and Exchange Commission rules, and smaller participants that provide financial products or services to 25 or fewer consumers per year. When Will the Rule Take Effect? The proposed rule, if finalized, will take effect sometime in late 2017 or 2018. Covered providers will not have to comply with the rule until 210 days after the final rule is published in the Federal Register . What Can (or Should) Banks Do? Submit comments on the proposed rule. Banks should consider submitting comments to the CFPB either directly or through industry groups. Because the rule is so broad and relates to so many types of products, services, and providers, there are many opportunities to provide com- ments to attempt to limit the scope and impact of the final rule. Affected institutions should consult with counsel to develop and submit appropriate comments. The CFPB is accepting comments on the proposed rule until August 22, 2016. Review affected consumer agreements. Banks should also undergo a review of their consumer finance contracts to: • Understand which of their agreements may be affected by the rule. Specific consideration must be given to whether the banks should amend its consumer agreements that containmandatory pre-dispute arbitration provisions, by removing those provisions in order to preserve the right to block class actions. • Ensure that they are careful to change only those contracts that are subject to this proposed rule. The proposed rule only applies to specific types of products and services. It is important for banks to remember that changes to the agreements do not need to occur yet, as the rule would apply only to agreements entered into after the rule goes into effect (i.e., 210 days after it is published). Importantly, because agreements in existence prior to the effective date are excluded from the rule, banks should also consider adding arbitration provisions with class action waivers to contracts that do not already contain those provisions and which will be executed prior to the effective date. Failure to analyze and amend consumer contracts appropriately could subject the bank to unexpected consumer class action lawsuits if and when the rule is finalized. Pay attention to current and future legal challenges. It is likely that there will be litigation challenging the CFPB’s actions. Although there are numerous possible grounds for challenging the CFPB’s proposed rule, the most likely will be based on whether the CFPB acted within the scope of its authority given to it by the Dodd-Frank Act in proposing and ultimately finalizing this rule. Specifically, while the Dodd-Frank Act authorizes the CFPB to issue regulations that “may prohibit or impose conditions or limitations on the use of” arbitration agreements, it only permits that action if the CFPB finds “that such a prohibition or imposition of conditions or limitations is in the public interest and for the protection of consumers.” Further, Dodd-Frank expressly requires that the CFPB conduct a study of the use of arbitration agreements between providers and consumers and that any findings made by the CFPB to support a proposed rule concerning arbitration agreements “shall be consistent with the study conducted.” In March 2015, the CFPB released a report on a study it con- ducted to evaluate the impact of arbitration provisions on consumers. The CFPB has relied on that study in justifying the proposals outlined in the current arbitration rule. However, despite the CFPB’s reliance on that study to justify its current rulemaking efforts, the study has been widely criticized as having relied on insufficient data and ignoring certain infor - mation that would lead to conclusions not favorable to the CFPB’s currently proposed rule. In addition, there are other unanswered legal questions concerning how the CFPB’s proposed rule comports with the numerous United States Supreme Court cases that uphold class action waivers in arbitration agreements. Further, the United States Court of Appeals for the D.C. Circuit recently heard oral arguments in PHH Corporation, et al. v. T he Consumer Financial Protection Bureau , in which one of the issues on appeal relates to the constitutionality of the CFPB. If the D.C. Circuit holds that the CFPB’s structure is unconstitutional, serious questions remain about the validity of any action taken by the CFPB up to that point, including enacting or enforcing the current proposed rule. As such, banks should watch these various challenges closely and respond appropriately. Bottom line, if this proposed rule is passed it will have a sig- nificant impact on the financial industry. As such, banks must begin to take steps now to prepare for the inevitable impact. n