Arbitration Agreements, 33210-33434 [2017-14225]

Download as PDF 33210 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations BUREAU OF CONSUMER FINANCIAL PROTECTION 12 CFR Part 1040 [Docket No. CFPB–2016–0020] RIN 3170–AA51 Arbitration Agreements Bureau of Consumer Financial Protection. ACTION: Final rule; official interpretations. AGENCY: 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 cfpb_reginquiries@ cfpb.gov. SUMMARY: SUPPLEMENTARY INFORMATION: mstockstill on DSK30JT082PROD with RULES2 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 1 Arbitration Agreements, 81 FR 32830 (May 24, 2016). VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 agreements that provide for the arbitration of any future disputes between consumers and providers of certain consumer financial products and services. Congress directed the Bureau to study these pre-dispute arbitration agreements in the Dodd-Frank Wall Street Reform and Consumer Protection Act (DoddFrank 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. 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 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 § 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. PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 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 E:\FR\FM\19JYR2.SGM 19JYR2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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 noncompliant 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. mstockstill on DSK30JT082PROD with RULES2 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 predispute arbitration agreements—which this final rule generally refers to as ‘‘arbitration agreements’’§ 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 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 6 Dodd-Frank section 1028(d). Black’s Law Dictionary (10th ed. 7 ‘‘Arbitration,’’ 2014). 8 Section 1040.2(d) defines the phrase ‘‘predispute arbitration agreement.’’ When referring to the definition, in § 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. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 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 201216 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 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)). 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). PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 33211 and their increasing use in markets for consumer financial products and services. 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. 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 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 WheelerLea 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). E:\FR\FM\19JYR2.SGM 19JYR2 33212 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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 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 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 21 Public Law 90–321, 82 Stat. 146 (1968). at title I. 23 15 U.S.C. 1640(a). 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 § 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. mstockstill on DSK30JT082PROD with RULES2 22 Id. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 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 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 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. 30 See, e.g., Wilcox v. Commerce Bank of Kansas City, 474 F.2d 336, 343–44 (10th Cir. 1973). 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. PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 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 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. E:\FR\FM\19JYR2.SGM 19JYR2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations B. History and Purpose of the Class Action Procedure mstockstill on DSK30JT082PROD with RULES2 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 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 That changed in 1966, when Federal Rule 23 was amended to create the class action mechanism that largely persists sec. 51:1409(A) (2006); Mont. Code Ann. sec. 30– 14–133(1) (2003); S.C. Code Ann. sec. 37–5–202(1) (1999). 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 § 1751’’ (3d ed. 2002). 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.’’). VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 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 PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 33213 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. These and other requirements of Federal Rule 23 are designed to ensure 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). 50 As one commenter noted, it is a procedural right not a substantive one. 51 Fed. R. Civ. P. 23(a)(1) through (4). E:\FR\FM\19JYR2.SGM 19JYR2 33214 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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. 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 52 See, e.g., Amchem Prod., Inc., 521 U.S. at 619– 21. 53 See Fed. R. Civ. P. 23(e). 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). 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). mstockstill on DSK30JT082PROD with RULES2 54 Federal VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 ‘‘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. 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 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. 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 R. Civ. P. 23(h). 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. 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’’). 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). PO 00000 59 Fed. 60 See Frm 00006 Fmt 4701 Sfmt 4700 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 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 64 28 U.S.C. 1332(d), 1453, and 1711–15. R. Civ. P. 23(f). See also Herbert B. Newberg, et al., ‘‘Newberg on Class Actions,’’ at § 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/rulespolicies/archives/agenda-books/advisorycommittee-rules-civil-procedure-april-2015. 68 564 U.S. 338, 131 S. Ct. 2541 (2011); see also Klonoff, supra note 45, at 775. 69 133 S. Ct. 1426 (2013). 65 Fed. E:\FR\FM\19JYR2.SGM 19JYR2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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 mstockstill on DSK30JT082PROD with RULES2 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, 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). 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. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 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 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 id. section 2 at 34–40. 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. 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). 86 43 N.Y. Stat. 833 (1925). PO 00000 77 See 78 See Frm 00007 Fmt 4701 Sfmt 4700 33215 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 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 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. 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, JuryWaiver 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. E:\FR\FM\19JYR2.SGM Continued 19JYR2 33216 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 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 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’’). 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, VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 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 2015) at 45 (‘‘[H]istorically the arbitration provision in our customer agreements generally has limited our exposure to consumer class action litigation. . . .’’). 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. 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. PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 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 The American Arbitration Association (AAA) likewise announced a moratorium on administering companyfiled 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 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 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-secures5-million-settlement-consumer-safeguards-againstbofa-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. 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=%2 FUCM%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. 104 9 U.S.C. 2 (providing that agreements to arbitrate ‘‘shall be valid, irrevocable, and E:\FR\FM\19JYR2.SGM 19JYR2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 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 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 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 onesided 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. 109 AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 344 (2011). VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 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 selfregulating 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 at 348–51. 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). 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. PO 00000 110 Id. 111 See Frm 00009 Fmt 4701 Sfmt 4700 33217 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 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 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/arbitrationprovisions-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. 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 MagnusonMoss 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). E:\FR\FM\19JYR2.SGM 19JYR2 33218 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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 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 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 119 See 80 FR 42710, 42719 (July 20, 2015). id. 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). 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 mstockstill on DSK30JT082PROD with RULES2 120 See VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 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 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). 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 PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 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. 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 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 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). 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.’’). 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. E:\FR\FM\19JYR2.SGM 19JYR2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 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. 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 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-streamlinedarbitration/. 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. 141 See AAA, ‘‘Class Arbitration Case Docket,’’ https://www.adr.org/casedockets (last visited Feb. 9, 2017). VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 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 § 1028(a).144 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 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). 144 Study, supra note 3. 145 Arbitration Study RFI, supra note 16. PO 00000 Frm 00011 Fmt 4701 Sfmt 4700 33219 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. 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 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 146 See generally Study, supra note 3, sections 6 and 8. 147 Id. at section 9. 148 Id. section 10 at 7–14. E:\FR\FM\19JYR2.SGM 19JYR2 33220 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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 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 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. mstockstill on DSK30JT082PROD with RULES2 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 149 See Myriam Gilles, ‘‘The End of Doctrine: Private Arbitration Public Law and the AntiLawsuit 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’’). 150 Bureau of Consumer Fin. Prot., ‘‘Arbitration Study Preliminary Results,’’ (Dec. 12, 2013), available at http://files.consumerfinance.gov/f/ 201312_cfpb_arbitration-study-preliminaryresults.pdf. 151 Id. at 129–131. 152 Id. at 129. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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. 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 153 The survey was assigned OMB control number 3170–0046. PO 00000 Frm 00012 Fmt 4701 Sfmt 4700 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 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 threeyear 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.156 154 Study, supra note 3, section 5 at 19–68. generally id. section 2. 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 155 See E:\FR\FM\19JYR2.SGM 19JYR2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 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 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 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 openended 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. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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. The Bureau’s sample of credit card contracts consisted of contracts filed by 423 issuers with the Bureau as required PO 00000 158 Id. 159 Id. section 2 at 3. section 2 at 4–6. Frm 00013 Fmt 4701 33221 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. 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.165 160 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). 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/16thmobile-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 Continued Sfmt 4700 E:\FR\FM\19JYR2.SGM 19JYR2 33222 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 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 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 consumers, on their wireless bill, for services provided by the third parties. 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. 174 Id. section 2 at 30. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 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 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 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 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 178 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. 177 Id. PO 00000 175 Id. Frm 00014 Fmt 4701 Sfmt 4700 section 2 at 44–47. section 2 at 46–47. 180 Id. section 2 at 33–34. 181 Id. section 2 at 31–32. 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. 179 Id. E:\FR\FM\19JYR2.SGM 19JYR2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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 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 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 183 Id. section 2 at 62–66. 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. 186 Id. section 2 at 62–66. 187 Id. section 2 at 61–62. 188 Id. section 2 at 53. 189 Id. section 2 at 72. mstockstill on DSK30JT082PROD with RULES2 184 Id. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 rights are more limited in arbitration.190 The Study found that this language was often capitalized or in boldfaced type.191 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 threefourths 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 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 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 section 2 at 72–79. section 2 at 72 and n.144. 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. 193 Id. section 2 at 50. 194 Id. section 2 at 51. 195 Id. PO 00000 190 Id. 191 Id. Frm 00015 Fmt 4701 Sfmt 4700 33223 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 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 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.201 196 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). 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. 199 Id. section 3 at 18. 200 Id. 201 Id. E:\FR\FM\19JYR2.SGM 19JYR2 33224 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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 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 202 Id. section 3 at 15. 203 Id. 204 Id. section 3 at 18. 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. mstockstill on DSK30JT082PROD with RULES2 205 Id. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 predispute arbitration agreements thought they could participate (56.7 percent).208 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 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 section 3 at 18–20. section 3 at 25. 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. PO 00000 207 Id. 208 Id. Frm 00016 Fmt 4701 Sfmt 4700 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 E:\FR\FM\19JYR2.SGM 19JYR2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 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 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 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. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 $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 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 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 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 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. 214 See, e.g., 15 U.S.C. 1640(a)(3) (TILA). 215 Study, supra note 3, section 4 at 12. 216 Id. section 4 at 13. 217 Id. section 4 at 13–14. 218 Id. section 4 at 14. 219 Id. PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 33225 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 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 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 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 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.225 220 Id. section 4 at 15. 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. 222 Study, supra note 3, section 4 at 18. 223 Id. section 4 at 18–20. 224 Id. section 4 at 20. 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. 221 Arbitration E:\FR\FM\19JYR2.SGM 19JYR2 33226 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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 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 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 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 226 Id. section 4 at 22–24. section 4 at 24. 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). 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 mstockstill on DSK30JT082PROD with RULES2 227 Id. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 information would aid the Bureau’s analysis of the effectiveness of arbitration clauses for consumers. 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. 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 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 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). 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)). 232 Study, supra note 3, section 2 at 70–71 and tbl. 15. PO 00000 Frm 00018 Fmt 4701 Sfmt 4700 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 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 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. 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. E:\FR\FM\19JYR2.SGM 19JYR2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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 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 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 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 238 Id. 239 Id. section 1 at 11. section 5 at 10. 240 Id. 241 Id. 242 Id. section 5 at 29. section 5 at 28–32. 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 mstockstill on DSK30JT082PROD with RULES2 243 Id. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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. 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 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 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. 247 Id. section 5 at 11. 248 Id. section 5 at 13. 249 Id. 250 Id. 251 Id. section 5 at 41, 43. 252 Id. section 5 at 13. PO 00000 Frm 00019 Fmt 4701 Sfmt 4700 33227 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 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 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 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 2.4 253 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. 255 Id. section 5 at 85. 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. 257 Id. section 5 at 71–73. E:\FR\FM\19JYR2.SGM 19JYR2 33228 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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 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. mstockstill on DSK30JT082PROD with RULES2 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 258 Id. section 5 at 69–70. section 5 at 70–71. 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. 259 Id. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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. 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. 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 261 Id. section 5 at 56–68. 262 Id. 263 See 81 FR 32830, 32856 (May 24, 2016); Study, supra note 3, section 5 at 9. PO 00000 Frm 00020 Fmt 4701 Sfmt 4700 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. 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 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, 264 Study, supra note 3, section 5 at 11–12. 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/empiricalstudy-class-actions-four-federal-district-courtsfinal-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. 265 See, E:\FR\FM\19JYR2.SGM 19JYR2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 and captured outcomes reflected on dockets through February 28, 2014. 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 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 267 LexisNexis, ‘‘Courtlink,’’ http://www. lexisnexis.com/en-us/products/courtlink-forcorporate-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. 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. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 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 273 Id. section 6 at 6. 33229 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 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. An additional 24.4 percent of the class cases (137 cases) involved a nonclass 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 274 Id. 275 Id. 280 Id. 276 Id. 281 Id. section 6 at 3–4. section 6 at 15 n.34. See also id. appendix 282 Id. section 6 at 4. section 5 at 10. 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. 277 Id. section 6 at 2–5. 278 Id. section 6 at 3. 279 Id. PO 00000 Frm 00021 Fmt 4701 Sfmt 4700 L. 283 Id. 284 Id. section 6 at 7. 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. 285 Id. E:\FR\FM\19JYR2.SGM 19JYR2 33230 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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 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 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 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 255 286 Id. mstockstill on DSK30JT082PROD with RULES2 287 Id. 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. 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. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 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 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 292 Id. section 6 at 9. 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 293 Id. 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). PO 00000 Frm 00022 Fmt 4701 Sfmt 4700 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-liondebtcollection-litigation-cfpb-complaint-statisticsdec-2015-year-in-review/. E:\FR\FM\19JYR2.SGM 19JYR2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations basis to question the accuracy of the Bureau’s data. mstockstill on DSK30JT082PROD with RULES2 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 refiled in arbitration in its AAA data. As is explained in Section 6 of the Study, the Bureau located nine of the 12 refilings 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 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 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. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 PO 00000 Frm 00023 Fmt 4701 Sfmt 4700 33231 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. 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, 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. 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. E:\FR\FM\19JYR2.SGM 19JYR2 33232 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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. 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 ‘‘Statelevel 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 Statelevel 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 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. 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 mstockstill on DSK30JT082PROD with RULES2 305 Study, 306 Id. supra note 3, section 7 at 5. section 7 at 6. 307 Id. 308 Preliminary Results, supra note 150, at 155 and 156 tbl. 10. 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. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 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 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 PO 00000 311 Id. 312 Id. section 7 at 8–9. section 1 at 16. 313 Id. Frm 00024 Fmt 4701 Sfmt 4700 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 carveouts. 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. 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 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 carveouts (meaning that both the consumer and company had the right to maintain a case in small claims court), some had arbitration clauses with a nonmutual 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. 315 Id. appendix Q at 117–18. E:\FR\FM\19JYR2.SGM 19JYR2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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 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. 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 316 See id. section 3 and section 7 at 6 n.19. 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). 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.’’). mstockstill on DSK30JT082PROD with RULES2 317 For VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 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 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. 321 Concepcion, 563 U.S. at 344. PO 00000 Frm 00025 Fmt 4701 Sfmt 4700 33233 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 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 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 These 419 settlements included cash relief, in-kind relief, and other expenses 322 See Study, supra note 3, section 8 at 8–9. section 8 at 10. 324 Id. section 8 at 11. 325 Id. section 8 at 10. 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. 323 Id. E:\FR\FM\19JYR2.SGM 19JYR2 33234 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 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. 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 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 382 331 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. 334 Id. section 8 at 28. 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 VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 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 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 In addition, the Study included a case study of In re Checking Account Overdraft Litigation, MDL No. 2036 (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. 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. 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. PO 00000 Frm 00026 Fmt 4701 Sfmt 4700 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 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 perconsumer 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.343 340 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. 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. E:\FR\FM\19JYR2.SGM 19JYR2 mstockstill on DSK30JT082PROD with RULES2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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. A nonprofit commenter, a research center commenter and several industry commenters also criticized the Study for not attempting to assess the underlying 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. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 predispute 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 PO 00000 Frm 00027 Fmt 4701 Sfmt 4700 33235 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 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. As for the related concern about the Bureau’s inclusion of certain class actions that commenters thought should have been excluded, the Bureau 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. 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). E:\FR\FM\19JYR2.SGM 19JYR2 33236 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 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. 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, 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). 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). VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 the data the commenter sought for the overdraft cases are within the normal range of values set out in the Study.351 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. 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. Regarding the Bureau’s selection of a five-year period review of class actions, the Bureau studied the longest time 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). 352 See id. section 8 at 38 tbls. 15 and 16. 353 See supra Part III.A. PO 00000 Frm 00028 Fmt 4701 Sfmt 4700 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 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. Finally, with regard to the concern related to the method used to report attorney’s fees, the Bureau notes that the 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). 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. E:\FR\FM\19JYR2.SGM 19JYR2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 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 358 Id. section 9 at 5 and appendix U at 141. 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, 359 The VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 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 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 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. 361 Id. section 9 at 8–10. 362 Id. section 9 at 4. PO 00000 Frm 00029 Fmt 4701 Sfmt 4700 33237 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 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 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 363 Id. 364 Id. E:\FR\FM\19JYR2.SGM 19JYR2 33238 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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 mstockstill on DSK30JT082PROD with RULES2 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. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 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 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. 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. PO 00000 Frm 00030 Fmt 4701 Sfmt 4700 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 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 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-indifference 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 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. 373 Id. section 10 at 17. 374 Id. section 10 at 6. E:\FR\FM\19JYR2.SGM 19JYR2 mstockstill on DSK30JT082PROD with RULES2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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 lowincome, 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 VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 PO 00000 Frm 00031 Fmt 4701 Sfmt 4700 33239 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. 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 375 See id. section 10 at 12. 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. 378 See id. section 10 at 15. 376 Id. E:\FR\FM\19JYR2.SGM 19JYR2 33240 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 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. 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. 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 differencein-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 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 379 See list of factors set out in Appendix V of the Study at page 148. 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. 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-actreport.pdf. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 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 Study, supra note 3, section 10 at 9. 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. PO 00000 382 See 383 See Frm 00032 Fmt 4701 Sfmt 4700 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. 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 385 Information Quality Act, Public Law 106–554, § 515, 114 Stat. 2763, 2763A–153–154 (2000); see Office of Mgmt. & Budget, ‘‘Information Management: Information Quality Guidelines,’’ available at https://www.opm.gov/informationmanagement/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/. E:\FR\FM\19JYR2.SGM 19JYR2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 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. 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. 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 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. 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-systemprotecting-consumers-debt-collection-litigation. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 PO 00000 Frm 00033 Fmt 4701 Sfmt 4700 33241 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 twoyear 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 E:\FR\FM\19JYR2.SGM 19JYR2 mstockstill on DSK30JT082PROD with RULES2 33242 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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 VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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. 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. 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). PO 00000 Frm 00034 Fmt 4701 Sfmt 4700 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 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 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. 394 See Arbitration Study RFI, supra note 16. E:\FR\FM\19JYR2.SGM 19JYR2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 received ongoing input regarding the appropriate Study scope. 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. 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 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 HarrisInteractiveSurvey forUSChamberofCommerce.pdf. Nor did this survey ask respondents their opinions about being blocked from filing or participating in a class action. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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. 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 Trade Comm’n, ‘‘Repairing a Broken System: Protection Consumers in Debt Collection Litigation,’’ (July 2010), available at https:// www.ftc.gov/reports/repairing-broken-systemprotecting-consumers-debt-collection-litigation. PO 00000 396 Fed. Frm 00035 Fmt 4701 Sfmt 4700 33243 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 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 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). E:\FR\FM\19JYR2.SGM 19JYR2 33244 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 Bureau’s consumer complaint database contained unrepresentative data.398 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 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 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.’’). 399 See Consumer Financial Class Actions and Public Enforcement (Sections 8 and 9 of Study) discussion above. 400 See Study, supra note 3, section 5 at 6–7. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 arbitration and class action outcomes, the Bureau notes that it expressly acknowledged the limitations of these data in the Study.401 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. 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 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 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 405 Study, e.g., id. section 5 at 4–8. 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 39–46 404 Doubling the number of consumers successful in AAA arbitrations filed in 2010 and 2011 would raise the number of successful consumers 32 to 64. PO 00000 401 See, Frm 00036 Fmt 4701 Sfmt 4700 supra note 3, section 5 at 17 n.30. section 5 at 11 n.17. 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. 410 Id. section 5 at 13. 406 Id. E:\FR\FM\19JYR2.SGM 19JYR2 mstockstill on DSK30JT082PROD with RULES2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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. 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 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. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 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 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 previouslyresolved 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 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. 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. PO 00000 Frm 00037 Fmt 4701 Sfmt 4700 33245 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. 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.418 416 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). 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_smallbusiness-review-panel-packet-explaining-theproposal-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:// E:\FR\FM\19JYR2.SGM Continued 19JYR2 33246 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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. 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 fullday 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. C. Additional Stakeholder Outreach mstockstill on DSK30JT082PROD with RULES2 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 www.consumerfinance.gov/newsroom/cfpbconsiders-proposal-to-ban-arbitration-clauses-thatallow-companies-to-avoid-accountability-to-theircustomers/. 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. 420 See Bureau of Consumer Fin. Prot., ‘‘Advisory Groups,’’ http://www.consumerfinance.gov/ advisory-groups/advisory-groups-meeting-details/ VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 predispute 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 predispute 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 (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. PO 00000 Frm 00038 Fmt 4701 Sfmt 4700 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 noncompliant 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 E:\FR\FM\19JYR2.SGM 19JYR2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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 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 § 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 § 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). mstockstill on DSK30JT082PROD with RULES2 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 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-arbitrationalbuquerque-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) VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 predispute 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 DoddFrank Act prescribes certain standards for rulemaking that the Bureau must follow in exercising its authority under section 1022(b)(1).425 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 § 1040.4(b) pursuant to the Bureau’s authority under Dodd-Frank section 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 DoddFrank Act). 426 Dodd-Frank section 1022(c)(3)(B). PO 00000 Frm 00039 Fmt 4701 Sfmt 4700 33247 1022(c), as well as its authority under Dodd-Frank section 1028(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, DoddFrank 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 E:\FR\FM\19JYR2.SGM 19JYR2 33248 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 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 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.’’). VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 by the Bureau’s particular expertise in the protection of consumers. 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. 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 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). 431 Treating consumer protection and public interest as two separate but overlapping criteria is PO 00000 Frm 00040 Fmt 4701 Sfmt 4700 to adopt this interpretation, giving the two phrases independent meaning.432 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 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. 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. E:\FR\FM\19JYR2.SGM 19JYR2 mstockstill on DSK30JT082PROD with RULES2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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. 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 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 434 Dodd-Frank section 1022(b)(2)(B) and (C). Bureau uses its expertise to balance competing interests, including how much weight to assign each policy factor or outcome. 435 The VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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. 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 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 section 1021(b)(1) and (2). Whitman v. Am. Trucking Ass’ns, Inc., 531 U.S. 457, 465 (2001). 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. PO 00000 436 Dodd-Frank 437 See Frm 00041 Fmt 4701 Sfmt 4700 33249 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 underenforcement 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’ E:\FR\FM\19JYR2.SGM 19JYR2 33250 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations interest in a ‘‘vibrant and flourishing financial market’’ as part of the standard. mstockstill on DSK30JT082PROD with RULES2 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 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 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. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 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 predispute 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. 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 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. 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.’’). 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) (‘‘. . . PO 00000 Frm 00042 Fmt 4701 Sfmt 4700 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. 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 consumers are protected from unfair, deceptive, or abuse acts and practices and from discrimination’’); 1021(b)(3) (‘‘. . . Federal consumer financial law is enforced consistently . . . .’’). E:\FR\FM\19JYR2.SGM 19JYR2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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. mstockstill on DSK30JT082PROD with RULES2 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 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 445 The Bureau uses its expertise to balance competing interests, including how much weight to assign each policy factor or outcome. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 Bureau considers these factors under the public interest prong. B. The Bureau’s Factual Findings Consistent With the Study and Further Analysis 33251 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-a-vis financial institutions. 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 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. 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 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. 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. PO 00000 Frm 00043 Fmt 4701 Sfmt 4700 E:\FR\FM\19JYR2.SGM 19JYR2 33252 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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. Comments Received mstockstill on DSK30JT082PROD with RULES2 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. 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 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. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 PO 00000 Frm 00044 Fmt 4701 Sfmt 4700 individual awards—the average recovery by the 32 consumers who won judgments on their affirmative claims was nearly $5,400.449 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 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 449 See Study, supra note 3, section 5 at 13. 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. 450 Id. E:\FR\FM\19JYR2.SGM 19JYR2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 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 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 takeit-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 predispute 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 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’’). 454 See generally Study, supra note 3, section 3. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 consumer financial services where predispute 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. 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. 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. PO 00000 455 See 456 Id. generally id. section 2. section 5 at 13–15. Frm 00045 Fmt 4701 Sfmt 4700 33253 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. 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 458 The Continued E:\FR\FM\19JYR2.SGM 19JYR2 33254 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 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 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 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. 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). 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. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 nondisclosure 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. 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 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.’’). 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-report2015.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. PO 00000 Frm 00046 Fmt 4701 Sfmt 4700 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: [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 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 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— 465 Carnegie v. Household Int’l, Inc., 376 F.3d 656, 661 (7th Cir. 2004). 466 28 U.S.C. App. 161 (1966). 467 Amchem Prod., 521 U.S. at 617 (citing Mace v. Van Ru Credit Corp., 109 F.3d 338, 344 (7th Cir. 1997)). 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. 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. E:\FR\FM\19JYR2.SGM 19JYR2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 a fee arrangement where an attorney is paid as a percentage of recovery, if any—or rely on an award of defendantpaid 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 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 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.’’). VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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, 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-directvcustomers-promotions-overcharging/. PO 00000 Frm 00047 Fmt 4701 Sfmt 4700 33255 therefore, the Bureau has no basis for finding that consumers rarely file individual lawsuits. 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 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 472 For example, commenters cited enforcement activities by the Bureau and State attorneys general. E:\FR\FM\19JYR2.SGM 19JYR2 mstockstill on DSK30JT082PROD with RULES2 33256 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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 VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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. 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 publicinterest 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 473 See David Horton & Andrea Cann Chandrasekher, ‘‘After the Revolution: An Empirical Study of Consumer Arbitration,’’ 104 Geo. L. J. 57, at 117 (2015). 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 PO 00000 Frm 00048 Fmt 4701 Sfmt 4700 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. 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’ riskreward 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. 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 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. 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.’’). 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/issuebriefs/2016/08/consumers-want-the-right-to-resolvebank-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. E:\FR\FM\19JYR2.SGM 19JYR2 mstockstill on DSK30JT082PROD with RULES2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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 highdollar 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. 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 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). VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 33257 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. 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 consumerfriendly 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. 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 twothirds 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. 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 478 ECOA, 15 U.S.C. 1691e(d); TILA, 15 U.S.C. 1640(a)(3). 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. 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). 481 Keri Anne Renzulli, ‘‘The Crazy Easy Trick to Getting a Credit Card Fee Waived or Your Rate PO 00000 Frm 00049 Fmt 4701 Sfmt 4700 E:\FR\FM\19JYR2.SGM Continued 19JYR2 33258 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 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. 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 lowincome 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 Lowered,’’ Money (Sept. 25, 2014), available at http://time.com/money/3425668/how-to-get-creditcard-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. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 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’’ 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). PO 00000 Frm 00050 Fmt 4701 Sfmt 4700 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. 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 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). E:\FR\FM\19JYR2.SGM 19JYR2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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. mstockstill on DSK30JT082PROD with RULES2 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 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. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 individual filings is low in comparison to the relative size of the market for consumer financial products and services. 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. 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 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-wellsfargo-100-million-widespread-illegal-practicesecretly-opening-unauthorized-accounts/. PO 00000 Frm 00051 Fmt 4701 Sfmt 4700 33259 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 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. A research center commenter also suggested that small claims are more commonly filed in arbitration with respect to non-consumer financial 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. 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. E:\FR\FM\19JYR2.SGM 19JYR2 mstockstill on DSK30JT082PROD with RULES2 33260 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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. 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, 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). VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 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. TMobile 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. PO 00000 Frm 00052 Fmt 4701 Sfmt 4700 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. 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 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-AndSwitch Mortgage Scheme,’’ (Aug. 12, 2014), available at https://www.consumerfinance.gov/ about-us/newsroom/cfpb-orders-amerisave-to-pay19-3-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. E:\FR\FM\19JYR2.SGM 19JYR2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 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. 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 memberowned, like credit unions. For example, 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’’). 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 repurchase 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/ComplainthandlingPrinciplesandBestPractice-April2007_000.pdf. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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, 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 lowincome 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.manhattaninstitute.org/html/class-actions-and-economicsinternal-dispute-resolution-and-financial-fee. PO 00000 Frm 00053 Fmt 4701 Sfmt 4700 33261 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. 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 500 Study, E:\FR\FM\19JYR2.SGM supra note 3, section 8 at 39–46. 19JYR2 33262 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 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. 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 preexisting 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 buyhere, 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 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 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. 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-directvbundled-services-directv-customers-promotionsovercharging/. 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-wellsfargo-100-million-widespread-illegal-practicesecretly-opening-unauthorized-accounts/. 505 Press Release, Bureau of Consumer Fin. Prot., ‘‘CFPB Takes First Action Against ‘Buy-Here, PayHere’ Auto Dealer,’’ (Nov. 9, 2014), available at https://www.consumerfinance.gov/about-us/ newsroom/cfpb-takes-first-action-against-buy-herepay-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_consentorder_drivetime.pdf. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 PO 00000 Frm 00054 Fmt 4701 Sfmt 4700 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 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 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). E:\FR\FM\19JYR2.SGM 19JYR2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 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 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. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 comparison to the cases that provide class relief. 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 nonmonetary benefits of class actions.511 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 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. 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-perclass-member recovery figure is a reasonable estimate. PO 00000 Frm 00055 Fmt 4701 Sfmt 4700 33263 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 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 predispute 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 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. E:\FR\FM\19JYR2.SGM 19JYR2 mstockstill on DSK30JT082PROD with RULES2 33264 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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 514 Study, supra note 3, section 8 at 30. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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. 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 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). PO 00000 Frm 00056 Fmt 4701 Sfmt 4700 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. 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 lowincome 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 516 Study, E:\FR\FM\19JYR2.SGM supra note 3, section 8 at 18 tbl. 3. 19JYR2 mstockstill on DSK30JT082PROD with RULES2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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. 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 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. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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. 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. 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 nonsupra note 3, section 6 at 37. 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). PO 00000 518 Study, 519 Mayer Frm 00057 Fmt 4701 Sfmt 4700 33265 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 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 521 E.g., Allen v. Gold Country Casino, 464 F.3d 1044, 1047 (9th Cir. 2006). E:\FR\FM\19JYR2.SGM 19JYR2 33266 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 ‘‘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. 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 522 See Iowa Code ch. 714H. 523 See 28 U.S.C. 1715(a). VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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. PO 00000 Frm 00058 Fmt 4701 Sfmt 4700 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 applesto-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 527 Study, supra note 3, appendix J at 62 tbl. 16. noted above in Part VI.B.2, the Study showed that consumers rarely pursue low value 528 As E:\FR\FM\19JYR2.SGM 19JYR2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 between the recoveries of an individual consumer in class actions and those in individual arbitration is unsurprising. 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. 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 claims in other fora, nor are many such claims resolved informally. 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. 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. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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, publicIndeed, 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. 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. PO 00000 Frm 00059 Fmt 4701 Sfmt 4700 33267 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. 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. 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 535 Id. section 8 at 5. 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. 536 Shepherd, E:\FR\FM\19JYR2.SGM 19JYR2 33268 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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. 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 ‘‘noinjury’’ 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 mstockstill on DSK30JT082PROD with RULES2 537 Shepherd, supra note 515, at 9. 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 538 In VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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. 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 rightskewed. 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. 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 marketing faxes, calls, texts, or emails. Johnston, supra note 520 at 32. 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. 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 PO 00000 Frm 00060 Fmt 4701 Sfmt 4700 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 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 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. E:\FR\FM\19JYR2.SGM 19JYR2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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. 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, mstockstill on DSK30JT082PROD with RULES2 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. 547 15 U.S.C. 1692k(a)(2)(B). VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 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. With respect to the contention that consumers were not made better off by 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). 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. PO 00000 Frm 00061 Fmt 4701 Sfmt 4700 33269 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. 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 552 The Bureau is not aware of any evidence demonstrating the extent to which the overdraft litigation had such an effect. 553 Study, supra note 3, section 8 at 4 n.7. E:\FR\FM\19JYR2.SGM 19JYR2 33270 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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. 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 554 Id. appendix S at 135. 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)). 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 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 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 mstockstill on DSK30JT082PROD with RULES2 555 See, VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 556 Study, supra note 3, section 8 at 22 and appendix S at 134. 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-changesto-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. PO 00000 Frm 00062 Fmt 4701 Sfmt 4700 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 inkind 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 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. 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 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, inkind 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. 564 81 FR 32830, 32847 (May 24, 2016). E:\FR\FM\19JYR2.SGM 19JYR2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 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. 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 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. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 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. PO 00000 Frm 00063 Fmt 4701 Sfmt 4700 33271 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. 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. 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 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. 567 Id. 568 Id. E:\FR\FM\19JYR2.SGM 19JYR2 33272 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 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 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 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 § 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 § 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). VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 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.574 571 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. 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. PO 00000 Frm 00064 Fmt 4701 Sfmt 4700 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 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 575 See id. at appendix O. 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.’’). 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). 576 See E:\FR\FM\19JYR2.SGM 19JYR2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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. 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 § 1040.3(b)(2) in Part VII. Further, the Bureau clarifies in § 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 580 Fed. R. Civ. P. 11. 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). mstockstill on DSK30JT082PROD with RULES2 581 See, VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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. 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 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. PO 00000 Frm 00065 Fmt 4701 Sfmt 4700 33273 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. 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 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 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 584 Study, supra note 3, section 6 at 7. id. section 6 at 57–58. 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. 585 See E:\FR\FM\19JYR2.SGM 19JYR2 mstockstill on DSK30JT082PROD with RULES2 33274 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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 VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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. 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 587 E.g., Douglas v. Wells Fargo, BC521016 (Ca. Super. Ct. 2013); Jabbari v. Wells Fargo, (N.D. Cal. 2015). PO 00000 Frm 00066 Fmt 4701 Sfmt 4700 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 588 See Concepcion, 563 U.S. 333 (2011). 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. 589 In E:\FR\FM\19JYR2.SGM 19JYR2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 applies. No commenters disagreed with any of the Bureau’s findings in this regard. 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.) 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. 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 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.’’). 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. 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). VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 PO 00000 Frm 00067 Fmt 4701 Sfmt 4700 33275 years after the class action was first filed.597 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. 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 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). 598 Study, supra note 3, section 6 at 61. 599 Id. section 6 at 57–58. E:\FR\FM\19JYR2.SGM 19JYR2 33276 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 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. 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. 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 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. 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. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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. 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. PO 00000 604 81 FR 32830, 32856 (May 24, 2016). Frm 00068 Fmt 4701 Sfmt 4700 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. 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 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. E:\FR\FM\19JYR2.SGM 19JYR2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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. mstockstill on DSK30JT082PROD with RULES2 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 publicinterest 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. 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 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. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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. 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 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-bc5a4f189f65282bpercent7D_Respond_APT_CFPB_ Survey_Fast_Facts_03-18-16.pdf. PO 00000 Frm 00069 Fmt 4701 Sfmt 4700 33277 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); E:\FR\FM\19JYR2.SGM Continued 19JYR2 33278 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 Consumer advocates and publicinterest 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. 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 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. 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.’’). VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 enforcement is insufficient. A publicinterest 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 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, 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). PO 00000 Frm 00070 Fmt 4701 Sfmt 4700 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 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 nondepository 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 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, § 17200 et seq.; Massachusetts Consumer Protection Law, G.L. c. 93A, § 9; N.Y. Gen. Bus. Law § 349(h); District of Columbia Consumer Protection Procedures Act, DC Code § 283905(k)(l)(A). 615 Bureau of Consumer Fin. Prot., ‘‘Financial Report of the Consumer Financial Protection E:\FR\FM\19JYR2.SGM 19JYR2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 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. 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 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). 616 Whether that will change, as one commenter suggested, is addressed below in this Part VI.B.5. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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. 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 PO 00000 Frm 00071 Fmt 4701 Sfmt 4700 33279 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. 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 617 Of course, these figures do not include investigations and other cases abandoned by the Bureau. E:\FR\FM\19JYR2.SGM 19JYR2 mstockstill on DSK30JT082PROD with RULES2 33280 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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 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 618 Study, supra note 3, section 9 at 4. 619 Id. 620 In re First Databank Antitrust Litig., 209 F.Supp.2d 96 (D.D.C. 2002) VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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. 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 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)). PO 00000 Frm 00072 Fmt 4701 Sfmt 4700 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 § 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. E:\FR\FM\19JYR2.SGM 19JYR2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 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. 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 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.’’). VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 relevant developments in class action litigation,624 for instance claims pertaining to EFTA,625 FACTA,626 624 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 noncompliant 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.’’). PO 00000 Frm 00073 Fmt 4701 Sfmt 4700 33281 FCRA,627 FDCPA,628 and the TCPA.629 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 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.’’). 630 See, e.g., Jones Day LLP, ‘‘The Future of Mandatory Consumer Arbitration Clauses,’’ E:\FR\FM\19JYR2.SGM Continued 19JYR2 33282 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 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 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 riskmitigation 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 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 JonesDay.com (Nov. 2015), available at http:// www.jonesday.com/the-future-of-mandatoryconsumer-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-actionwave-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-ECommerce-The-Next-Target-of-Big-Data-ClassActions.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-feelawsuits. 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.’’). 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 VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 PO 00000 Frm 00074 Fmt 4701 Sfmt 4700 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 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 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. 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/foreigntransaction-fee-1282.php (‘‘[I]n most cases the companies voluntarily began disclosing fees once the suit was filed.’’). E:\FR\FM\19JYR2.SGM 19JYR2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 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. 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 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. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 markets represents a considerable increase.641 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 reliefto-total consumer harm ratios and the sum of cash settlement relief. Using 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. 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. PO 00000 641 The Frm 00075 Fmt 4701 Sfmt 4700 33283 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-tolow reordering method to calculate overdraft fees. 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 wideranging benefits for consumers over and 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. 644 Assuming the average class period was the 10year 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. E:\FR\FM\19JYR2.SGM 19JYR2 33284 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 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. 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. 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 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). 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 VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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. 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. 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 incorporates this discussion with respect to its public interest findings as well. 647 See Study, supra note 3, section 5 at 75–76. PO 00000 Frm 00076 Fmt 4701 Sfmt 4700 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, E:\FR\FM\19JYR2.SGM 19JYR2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 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. 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 648 Study, supra note 3, section 6 at 7. 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). 650 Shepherd, supra note 515, at 2. 649 The VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 § 1040.3(b) below in Part VII. 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 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 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. PO 00000 Frm 00077 Fmt 4701 Sfmt 4700 33285 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 E:\FR\FM\19JYR2.SGM 19JYR2 33286 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 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. 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 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. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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, notfor-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. 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 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 § 1040.3. PO 00000 Frm 00078 Fmt 4701 Sfmt 4700 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 E:\FR\FM\19JYR2.SGM 19JYR2 mstockstill on DSK30JT082PROD with RULES2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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 publicinterest 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 VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 33287 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. 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. 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 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/factsheet-civil-rights-class-actions-singularly-effectivetool-combat-discrimination. 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. PO 00000 Frm 00079 Fmt 4701 Sfmt 4700 E:\FR\FM\19JYR2.SGM 19JYR2 mstockstill on DSK30JT082PROD with RULES2 33288 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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. 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 656 Study, supra note 3, section 2 at 46–47. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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. 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 657 U.S. Courts, ‘‘Federal Judicial Caseload Statistics 2016,’’ (June 2016) available at http:// www.uscourts.gov/statistics-reports/federaljudicial-caseload-statistics-2016. PO 00000 Frm 00080 Fmt 4701 Sfmt 4700 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 E:\FR\FM\19JYR2.SGM 19JYR2 mstockstill on DSK30JT082PROD with RULES2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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. 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 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. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 PO 00000 Frm 00081 Fmt 4701 Sfmt 4700 33289 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 publicinterest 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 consumers who choose it), for all the reasons stated in this Part VI.C.1. E:\FR\FM\19JYR2.SGM 19JYR2 33290 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 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 postdispute 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. 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 660 The Bureau did not receive any comments from consumer advocates or others asserting this position, however. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 § 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 prepayment 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’’ 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). PO 00000 Frm 00082 Fmt 4701 Sfmt 4700 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. 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 664 That issue is addressed more fully below in Part VII in the section-by-section analysis of § 1040.3, in which the Bureau responds to the CRA’s request for an exception to the class rule. E:\FR\FM\19JYR2.SGM 19JYR2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 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. With these examples, as well as the EFTA ATM ‘‘sticker’’ litigation example discussed in the proposal and above,667 665 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.’’). 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 VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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. 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: 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. 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/cfpbproposes-new-rule-on-mandatory-consumerarbitration-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 PO 00000 Frm 00083 Fmt 4701 Sfmt 4700 33291 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 consumerfacing 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, principalagency 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 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 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=8e53e969-23346428-811c-ff00004cbded (stating that ‘‘CFPBregulated 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/NewCoordinates-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’’). 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-toRestrict-the-Use-of-Mandatory-Arbitration-Clausesand-Class-Action-Waivers. 672 The Bureau adopts this definition of ‘‘overdeterrence’’ (i.e., deterring legally ambiguous and E:\FR\FM\19JYR2.SGM Continued 19JYR2 33292 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 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 ‘‘overdeterred.’’ To the extent that the comment was referring to an ‘‘overdeterrent’’ 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. 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 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. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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. 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 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. PO 00000 Frm 00084 Fmt 4701 Sfmt 4700 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. 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-infact (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 674 See infra note 740 (classwide statutory damage caps). 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.’’). E:\FR\FM\19JYR2.SGM 19JYR2 mstockstill on DSK30JT082PROD with RULES2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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. 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 VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 PO 00000 Frm 00085 Fmt 4701 Sfmt 4700 33293 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 for the Bureau to decide whether it will conduct an assessment of this final rule pursuant to DoddFrank section 1022(d), similar to what it has announced recently regarding certain other final rules. E:\FR\FM\19JYR2.SGM 19JYR2 33294 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 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 smalldollar 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 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-285million-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-creditunions-face-overdraft-suits. See generally NCUA, ‘‘Administrative Orders,’’ available at https:// www.ncua.gov/regulation-supervision/Pages/rules/ VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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. 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. 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 administrative-orders.aspx (listing dozens of government enforcement actions against credit unions each year). 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-wellsfargo-100-million-widespread-illegal-practicesecretly-opening-unauthorized-accounts/. 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-launderingviolations-settles. 684 The complaint in this case detailed how the company had gathered 550,928 complaints of fraudulent money transfers involving $632 million. PO 00000 Frm 00086 Fmt 4701 Sfmt 4700 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 noncompliance 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 predispute 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 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. E:\FR\FM\19JYR2.SGM 19JYR2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 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. 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 411 685 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.’’). VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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. 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. With respect to some industry commenters’ contention that antiseverability provisions in arbitration agreements show that providers would choose to remove arbitration agreements if this rule were finalized, the Bureau supra note 3, section 1 at 11. 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. PO 00000 687 Study, 688 Id. Frm 00087 Fmt 4701 Sfmt 4700 33295 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 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. 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. E:\FR\FM\19JYR2.SGM 19JYR2 mstockstill on DSK30JT082PROD with RULES2 33296 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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 costshifting 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. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 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. 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 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). 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). PO 00000 Frm 00088 Fmt 4701 Sfmt 4700 contradicted the Bureau’s Study and supported commenters’ assertion that most harms were individualized and not classable.695 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. 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. E:\FR\FM\19JYR2.SGM 19JYR2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 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 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 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 noncompliance. 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.’’). VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 PO 00000 Frm 00089 Fmt 4701 Sfmt 4700 33297 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 E:\FR\FM\19JYR2.SGM 19JYR2 33298 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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 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. mstockstill on DSK30JT082PROD with RULES2 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 697 See Fin. Crisis Inquiry Comm’n, ‘‘The Financial Crisis Inquiry Report,’’ at 104–05 (2011), available at https://www.gpo.gov/fdsys/pkg/GPOFCIC/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-actreport.pdf. 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. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 predispute 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 longterm success of FINRA’s similar rule as applied to broker-dealers and their customers.700 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 700 FINRA, ‘‘Class Action Claims,’’ at Rule 12204(d). 701 The Bureau received over 110,000 similar comments, mostly from individuals. PO 00000 Frm 00090 Fmt 4701 Sfmt 4700 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. 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 passthrough 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 passthrough 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 E:\FR\FM\19JYR2.SGM 19JYR2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 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 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 smalldollar 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 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. 703 The application of the rule to Tribal entities and credit unions is discussed below in the sectionby-section analysis of 1040.3 in Part VII. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 small businesses, or to invest in technology upgrades and employee retention. The commenter referred to this effect as creating ‘‘dead capital.’’ 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 § 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. PO 00000 Frm 00091 Fmt 4701 Sfmt 4700 33299 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 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 704 Study, 705 Mayer E:\FR\FM\19JYR2.SGM supra note 3, section 8 at 34 tbl. 11. Brown, supra note 519. 19JYR2 33300 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 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 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 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. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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. 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 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). PO 00000 Frm 00092 Fmt 4701 Sfmt 4700 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 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 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 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. 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. E:\FR\FM\19JYR2.SGM 19JYR2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 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). 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 713 U.S. Courts, ‘‘Federal Judicial Caseload Statistics 2016,’’ (June 2016), available at http:// www.uscourts.gov/statistics-reports/federaljudicial-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. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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. 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. 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 § 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 715 563 U.S. 333 (2011). (quoting Moses H. Cone Memorial Hospital v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983)). 717 Utah Code 70C–3–14. 716 Id. 714 Gutierrez v. Wells Fargo Bank, N.A., 730 F. Supp. 2d 1080, 1082 (N.D. Cal. 2010). PO 00000 Frm 00093 Fmt 4701 Sfmt 4700 33301 E:\FR\FM\19JYR2.SGM 19JYR2 33302 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations protection of consumers) because it would contradict the determination of the Utah legislature.718 mstockstill on DSK30JT082PROD with RULES2 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.719 718 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. 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 VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 passthrough 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. 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 noncompliance. 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. 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. PO 00000 Frm 00094 Fmt 4701 Sfmt 4700 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 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 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. E:\FR\FM\19JYR2.SGM 19JYR2 mstockstill on DSK30JT082PROD with RULES2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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 passthrough 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 § 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 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. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 memberowned—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. 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 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. 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 PO 00000 Frm 00095 Fmt 4701 Sfmt 4700 33303 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 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 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). E:\FR\FM\19JYR2.SGM 19JYR2 33304 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 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 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 wellfunctioning 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 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. 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-benefitconsumers/ (‘‘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 VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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. 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 consumers through dangers such as hidden costs or confusing terms.’’). 730 Study, supra note 3, section 8 at 33 tbl. 10. PO 00000 Frm 00096 Fmt 4701 Sfmt 4700 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 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 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. 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 E:\FR\FM\19JYR2.SGM 19JYR2 mstockstill on DSK30JT082PROD with RULES2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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. 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. 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, wrongdoers will no longer be deterred out of fear of potential class action liability.’’). 734 See, e.g., Federal Judicial Center, ‘‘Manual for Complex Litigation,’’ at § 21.7 (4th ed. Thomson West 2016). VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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.737 735 E.g., Newberg et al., supra note 65, at § 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 § 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 § 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 PO 00000 Frm 00097 Fmt 4701 Sfmt 4700 33305 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). 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 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)). 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 E:\FR\FM\19JYR2.SGM Continued 19JYR2 33306 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 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. 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 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). 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). VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 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 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 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. 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. PO 00000 Frm 00098 Fmt 4701 Sfmt 4700 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. 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 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). 750 Johnston, supra note 520, at 31. That paper also found the average nominal settlement in those cases to be relatively low: $58,724. E:\FR\FM\19JYR2.SGM 19JYR2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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 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 751 Study, supra note 3, section 8 at 34 tbl. 11. mstockstill on DSK30JT082PROD with RULES2 752 Id. 753 Id. section 8 at 4 n.5 and n.9. Judicial Center, ‘‘Manual for Complex Litigation,’’ at § 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. § 14.231. 754 Federal VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 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 755 See generally Newberg et al., supra note 65, at § 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. PO 00000 Frm 00099 Fmt 4701 Sfmt 4700 33307 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 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 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-idUSN204016322 0080321; 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. 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’’). E:\FR\FM\19JYR2.SGM 19JYR2 33308 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 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. 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. 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. 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 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). 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. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 PO 00000 Frm 00100 Fmt 4701 Sfmt 4700 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 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 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. E:\FR\FM\19JYR2.SGM 19JYR2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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 765 Id. section 3 at 11–15. 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. § 302.001 (‘‘The maximum rate or amount of interest is 10 percent a year except as otherwise provided by law.’’); N.Y. Banking Law § 14-a (‘‘The maximum rate of interest . . . shall be sixteen per centum per annum.’’); Ohio Rev. Code Ann. § 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.’’). mstockstill on DSK30JT082PROD with RULES2 766 This VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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. 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 769 E.g., Richard A. Lord, ‘‘Williston on Contracts’’ at § 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). 770 Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 26 (1991) (citing Moses H. Cone Memorial PO 00000 Frm 00101 Fmt 4701 Sfmt 4700 33309 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. 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 § 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 Hospital v. Mercury Construction Corp., 460 U.S. 1, 24 (1983)). 771 Compucredit Corp. v. Greenwood, 132 S. Ct. 665 (2012). 772 Utah Code 70C–3–14. E:\FR\FM\19JYR2.SGM 19JYR2 33310 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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 It also bears noting that, as described in Part VI.A above, a group of Statelegislator 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. mstockstill on DSK30JT082PROD with RULES2 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 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. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 § 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 § 1040.4(b) below, the Bureau is expanding the list of records PO 00000 Frm 00102 Fmt 4701 Sfmt 4700 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. 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 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. E:\FR\FM\19JYR2.SGM 19JYR2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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 mstockstill on DSK30JT082PROD with RULES2 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 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. 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. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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. 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, PO 00000 Frm 00103 Fmt 4701 Sfmt 4700 33311 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. E:\FR\FM\19JYR2.SGM 19JYR2 mstockstill on DSK30JT082PROD with RULES2 33312 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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 abovementioned 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 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). VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 identify when consumers are harmed by providers’ nonpayment of fees. 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 § 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 § 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 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 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. PO 00000 Frm 00104 Fmt 4701 Sfmt 4700 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 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 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). E:\FR\FM\19JYR2.SGM 19JYR2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 particular arbitral procedures— constitute unfair, deceptive, or abusive acts and practices pursuant to DoddFrank 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. 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. 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 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 nondisclosure provisions, limits on substantive relief, and cost and fee-shifting). 785 Id. section 2 at 34–40; see generally id. section 4. 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. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 PO 00000 Frm 00105 Fmt 4701 Sfmt 4700 33313 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 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 predispute 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 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). 789 See Dodd-Frank, section 1028(c). E:\FR\FM\19JYR2.SGM 19JYR2 33314 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 overall findings on the fairness of predispute arbitration. 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 lawbreaking 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 VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 nonparties 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 PO 00000 Frm 00106 Fmt 4701 Sfmt 4700 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 § 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 E:\FR\FM\19JYR2.SGM 19JYR2 mstockstill on DSK30JT082PROD with RULES2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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 VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 lowincome 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 § 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 PO 00000 Frm 00107 Fmt 4701 Sfmt 4700 33315 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 reidentify 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 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 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-complaintdatabase-summary-jul2015.htm. E:\FR\FM\19JYR2.SGM 19JYR2 33316 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 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 791 See generally Dodd-Frank section 1021(b) (setting forth the Bureau’s purposes). VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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. 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 PO 00000 Frm 00108 Fmt 4701 Sfmt 4700 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 DoddFrank 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. The Bureau believes that publication will assist academic researchers with analyzing consumer arbitration. To date, 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). E:\FR\FM\19JYR2.SGM 19JYR2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 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. 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. 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 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). 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’’). VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 § 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. PO 00000 Frm 00109 Fmt 4701 Sfmt 4700 33317 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). 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.3 795 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’’). E:\FR\FM\19JYR2.SGM 19JYR2 mstockstill on DSK30JT082PROD with RULES2 33318 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations above, class actions are more likely to serve as a vehicle for adjudicating smalldollar 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. 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 § 1040.4(b)(3) before publishing them, and pursuant to new § 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 noncompliance with § 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 § 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 predispute 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 predispute 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. 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 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). 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). VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 PO 00000 Frm 00110 Fmt 4701 Sfmt 4700 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, Bureaupublished 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. 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 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.’’). E:\FR\FM\19JYR2.SGM 19JYR2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 investigate and pursue trends that they discover in the arbitration records on the Bureau’s Web site.799 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. 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 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). 800 Study supra note 3, section 6 at 54–61. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 § 1040.4(b)(3) will substantially reduce the availability of personal and financial information. Further, to address these concerns, the Bureau is adopting § 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, § 1040.4(b)(3) requires the redaction of information identifying individual consumers, and new § 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 PO 00000 Frm 00111 Fmt 4701 Sfmt 4700 33319 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, memberowned 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. With regard to the concern that the loss of arbitral confidentiality would compromise the privacy of providers and their employees, the Bureau notes that § 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 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. 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.’’). E:\FR\FM\19JYR2.SGM 19JYR2 33320 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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 selfregulatory 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. 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 § 1040.1 to set forth the authority for issuing the regulation and the regulation’s purpose. mstockstill on DSK30JT082PROD with RULES2 1(a) Authority Proposed § 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 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. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 predispute 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 § 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 § 1040.1(a) and is finalizing this provision as proposed. 1(b) Purpose Proposed § 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 § 1040.1(b) and is finalizing this provision as proposed with one addition. Final § 1040.1(b) PO 00000 Frm 00112 Fmt 4701 Sfmt 4700 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 § 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 § 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 § 1040.4(a)(1) concern class actions. Proposed § 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 publicinterest 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 § 1040.4 that would prohibit providers from moving to compel arbitration in a multipleplaintiff 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 § 1040.2(a) as E:\FR\FM\19JYR2.SGM 19JYR2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 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 § 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 VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 § 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 § 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 § 1040.2(b) and § 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. Both a consumer advocate and a public-interest consumer lawyer commenter expressed concern about the phrase ‘‘between a provider and a 806 As noted below, for ease of reference, the Bureau has re-numbered the definition of predispute arbitration agreement in the final rule as § 1040.2(c). The definition of provider, which was § 1040.2(c) in the proposal, is § 1040.2(d) in the final rule. PO 00000 Frm 00113 Fmt 4701 Sfmt 4700 33321 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 § 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 § 1040.4 would have applied only to providers; thus, in the commenters’ view, it is unnecessary also to limit the scope of the term predispute 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 publicinterest consumer lawyer commenter requested that the Bureau replace the word ‘‘provider’’ with the phrase ‘‘person’’ as defined in Dodd-Frank section 1002(19).807 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 § 1040.2(d) was limited to agreements providing for arbitration of any future dispute between the parties because they were 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.’’ E:\FR\FM\19JYR2.SGM 19JYR2 33322 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 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 After consideration of the comments, the Bureau is finalizing the definition of pre-dispute arbitration agreement with modifications as described below.810 Final § 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 § 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.’’ Final § 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 § 1040.3(a).’’ This limitation is already built into the operation of the rule because § 1040.4 only applies to predispute arbitration agreements concerning consumer financial products or services. Nonetheless, for clarity, the 808 This commenter also recommended that the Bureau revise § 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 § 1040.4 to prohibit providers from relying on delegation provisions. 810 For ease of reference, the Bureau has renumbered this definition in the final rule as § 1040.2(c); the definition of provider, which was proposed § 1040.2(c), is § 1040.2(d) in this final rule. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 § 1040.4 apply to providers as defined in proposed § 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 § 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 § 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 § 1040.2(c) defines ‘‘predispute arbitration agreement’’ as an agreement between a covered person and a consumer, the rule’s substantive requirements, which are contained in § 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 § 1040.4 would not apply to any such persons entering into a pre-dispute arbitration agreement because they are not ‘‘providers,’’ by virtue of § 1040.2(d) (stating that persons excluded under § 1040.3(b) are not providers) and § 1040.3(b)(6) (excluding any person to the extent not subject to the Bureau’s rulemaking authority including under PO 00000 Frm 00114 Fmt 4701 Sfmt 4700 sections 1027 or 1029). The comment further clarifies that the requirements in § 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 § 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 § 1040.4, because those requirements apply only to providers, and such automobile dealers, while they are covered persons, are excluded by § 1040.3(b)(6) and therefore are not providers under § 1040.2(d). The requirements in § 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 § 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 predispute arbitration agreement in § 1040.2(c) includes delegation provisions because such provisions are agreements between covered persons and consumers providing for arbitration 811 As noted above, the commenter also recommended that the Bureau revise proposed § 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-ACenter 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.’’). E:\FR\FM\19JYR2.SGM 19JYR2 mstockstill on DSK30JT082PROD with RULES2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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, § 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 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 predispute 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 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.’’). VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 communications with the class.814 Regarding the public-interest consumer lawyer’s concern that providers would respond to the rule by abandoning predispute 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 § 1040.2(d), because they concern a future dispute. 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 § 1040.2(c). The Bureau believes that it is clear that, where a predispute 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. 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’’). PO 00000 Frm 00115 Fmt 4701 Sfmt 4700 33323 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 § 1040.2(c) would have defined the term provider as a subset of the term covered person. Specifically, proposed § 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 § 1040.3(a) to the extent that the person is not excluded under proposed § 1040.3(b); or (2) an affiliate of a provider as defined in proposed § 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). Proposed comment 2(c)–1 would have clarified that a provider as defined in proposed § 1040.2(c) that also engages in offering or providing products or services not covered by proposed § 1040.3 must comply with this part only for the products or services that it offers or provides that would be covered by proposed § 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 § 1040.3(a)(7) with respect to the transmittal of funds, but the same 815 For example, proposed § 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. E:\FR\FM\19JYR2.SGM 19JYR2 33324 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 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 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 § 1040.2(d); the definition of predispute arbitration agreement, which was § 1040.2(d) in the proposal, is § 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 § 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 § 1040.2(d)(1) and (2). In particular, even if an affiliated service provider does not meet the definition of provider in § 1040.2(d)(2), because it provides services to a person who is excluded from the rule under § 1040.3(b) and who thus is not a provider, the affiliated service provider still could be a 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 § 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 § 1040.3(a). The Bureau also intends this phrase to convey that, even if an entity would be a provider under proposed § 1040.2(c) because it offers or provides consumer financial products or services covered by proposed § 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 § 1040.3(a). 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 § 1040.3, below. 818 In the commentary to the definition of provider, the Bureau has corrected the crossreference to transmitting funds coverage, which is in § 1040.3(a)(7), and has clarified when that coverage would apply. The Bureau also has shortened the definition in § 1040.2(d)(1) to refer to an ‘‘activity’’ covered by § 1040.3(a), so that the terms governing which activities are covered appear in § 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. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 provider as defined in § 1040.2(d)(1). For example, if an affiliate of a merchant excluded by § 1040.3(b)(6) services consumer credit extended by the merchant, the affiliate servicer may meet the definition of provider in § 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. 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 DoddFrank Act. Accordingly, while the Bureau has chosen to exempt certain government entities under § 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 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 819 See supra section-by-section analysis of § 1040.3(b)(2). PO 00000 Frm 00116 Fmt 4701 Sfmt 4700 ‘‘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 § 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. A consumer lawyer commenter requested that the Bureau add to § 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 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). 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. E:\FR\FM\19JYR2.SGM 19JYR2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 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 The Bureau declines to add to § 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 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 § 1040.3(a). 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). VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 provider’s obtaining legal advice based on the facts in a particular case.827 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— § 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 § 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 predispute because the term is only relevant in the context of the term predispute arbitration agreement, which § 1040.2(c) already defines. 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 § 1040.3 to set forth the products and services to which proposed part 1040 would apply. Proposed § 1040.3(a) generally would have provided a list of products and services that would be covered by the proposal, while proposed § 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 827 See also the section-by-section analysis for § 1040.3(a)(1), below, which discusses additional comments the Bureau received concerning life insurance policy loans. 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). PO 00000 Frm 00117 Fmt 4701 Sfmt 4700 33325 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 § 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 § 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 § 1040.3(a). As discussed in the sectionby-section analysis of ‘‘provider’’ (see § 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 § 1040.3(a) generally is subject to the proposal, except to the extent an exclusion in proposed § 1040.3(b) applies to that person. Proposed § 1040.3(b) thus described exceptions to proposed § 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. 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)). 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 § 1040.3(b). E:\FR\FM\19JYR2.SGM 19JYR2 33326 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations However, as discussed in the section-bysection analysis of proposed § 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 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 § 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 § 1040.3(a)(6).832 830 12 U.S.C. 5517 and 5519. as also discussed in greater detail in the section-by-section analysis of proposed § 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). 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 § 1040.3(a)(6), as is discussed below. See Prepaid Accounts Under the Electronic Fund Transfer Act (Regulation E) and the mstockstill on DSK30JT082PROD with RULES2 831 However, VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 To effectuate this approach, the Bureau specifically proposed in § 1040.3(a) that proposed part 1040 generally would have applied to predispute arbitration agreements for the products or services listed in proposed § 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. 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 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). 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. PO 00000 Frm 00118 Fmt 4701 Sfmt 4700 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 DoddFrank 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. 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 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 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. 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. E:\FR\FM\19JYR2.SGM 19JYR2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 reliance on the arbitration agreement in a class action (proposed § 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 § 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 § 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 (§ 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 VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 behalf of the creditor may be a service provider, but also would be covered directly (see § 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 The Bureau is also making minor technical revisions to the introductory paragraph of § 1040.3(a). First, because the definition of pre-dispute arbitration agreement in § 1040.2(c) already refers to agreements concerning the consumer financial products and services listed in § 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 § 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 § 1040.3(b).’’ The Bureau is adopting this change to indicate that although a product or service may be listed in § 1040.3(a), a person described in § 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 § 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) 836 See, e.g., Cal. Civ. Code § 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’’). 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 PO 00000 Frm 00119 Fmt 4701 Sfmt 4700 33327 describes some of the covered products and services using the term ‘‘providing.’’ For example, § 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. The Bureau is adopting comment 3(a)–1 to § 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-bysection analysis of § 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 § 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 § 1040.3(a)(10). In particular, proposed § 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 § 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 § 1040.3(a)(1)(i); or (v) servicing an extension of consumer financial product or service that is ‘‘offered or provided’’ in specified circumstances). E:\FR\FM\19JYR2.SGM 19JYR2 33328 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations credit covered by proposed § 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 § 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 § 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 § 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, mstockstill on DSK30JT082PROD with RULES2 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’’). VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 which would have facilitated compliance with proposed part 1040. 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-bysection analysis to proposed § 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 § 1040.3(a)(1), exemptions proposed in § 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 Comments Received The Bureau received a number of comments on in its proposed approach to covering extensions of consumer credit in proposed § 1040.3(a)(1). For the most part, these comments focused 841 See 81 FR 32830, 32879–84 (May 24, 2016), and the discussion of § 1040.3(b) below. 842 As indicated in the proposal, certain automobile dealers would have been exempt, however, under proposed § 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 § 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 § 1040.3(b)(2). Id. at 32873 n.449. PO 00000 Frm 00120 Fmt 4701 Sfmt 4700 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 § 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 E:\FR\FM\19JYR2.SGM 19JYR2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 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 § 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. 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).845 843 See also the section-by-section analysis of § 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 thirdparty billing and advocating for an exemption to ensure these products or services are not discontinued to the detriment of consumers § 1). 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 VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 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 § 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. 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 PO 00000 Frm 00121 Fmt 4701 Sfmt 4700 33329 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 McCarranFerguson 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 The Final Rule The Bureau is adopting § 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 § 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 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 § 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.’’ 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’’). E:\FR\FM\19JYR2.SGM 19JYR2 mstockstill on DSK30JT082PROD with RULES2 33330 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations believes these revisions will provide greater certainty as to the scope of these subparagraphs. 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 § 1040.3(a)(7) or payment processing under § 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 § 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 § 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 § 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 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). VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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. 3(a)(1)(iii) The Bureau’s Proposal Proposed § 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 § 1040.3(a)(1)(iii) would only have applied to persons who are regularly engaging in these activities.856 Because the Bureau did not generally propose to cover activities of merchants to facilitate payment for the merchants’ 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. 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 homeimprovement 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 § 1040.3(b)(3) and the section-by-section analysis thereto, 81 FR 32830, 32882–83 (May 24, 2016), and the discussion below on § 1040.3(b)(3) in the final rule. PO 00000 Frm 00122 Fmt 4701 Sfmt 4700 own nonfinancial goods or services,857 proposed § 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 § 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 Comments Received With regard to proposed § 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 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 § 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 § 1040.3(a)(1)(ii) unless the merchant was subject to one of the exemptions in proposed § 1040.4(b). 81 FR 32830, 32874 n.454 (May 24, 2016). E:\FR\FM\19JYR2.SGM 19JYR2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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 § 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. mstockstill on DSK30JT082PROD with RULES2 The Final Rule The Bureau is finalizing proposed § 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 § 1040.3(a)(1)(iii)(C) excludes from the coverage of § 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 § 1040.3(a). As explained in the proposal, the Bureau’s goal in proposing a primary business limitation on § 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 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 § 1040.3(a)(1)(iii) into subparagraphs (A), (B) and (C). 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. VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 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 § 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 § 1040.3(a), including § 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. 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’’). 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/staffperspective-follow-lead/staff_perspective_follow_ the_lead_workshop.pdf. See also section-by-section analysis of § 1040.3(a)(3) below (discussing comments on lead generators more broadly). PO 00000 Frm 00123 Fmt 4701 Sfmt 4700 33331 3(a)(1)(iv) and (v) Proposed § 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 § 1040.3(a)(1)(i). First, proposed § 1040.3(a)(1)(iv) would have covered acquiring, purchasing, or selling an extension of consumer credit that would have been covered by proposed § 1040.3(a)(1)(i). In addition, proposed § 1040.3(a)(1)(v) would have covered servicing of an extension of consumer credit that would have been covered by proposed § 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 § 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 § 1040.3(a)(1)(v). A consumer advocate and a public-interest consumer lawyer expressed support for how this proposed coverage would reach thirdparty 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, publicinterest 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 864 These comments are discussed in more detail in the section-by-section analysis of § 1040.3(a)(4) below. E:\FR\FM\19JYR2.SGM 19JYR2 mstockstill on DSK30JT082PROD with RULES2 33332 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations 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. 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 § 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 § 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 § 1040.3(a)(1)(v). The Bureau disagrees 865 This comment is discussed in more detail in the section-by-section analysis of § 1040.3(a)(7) below. 866 81 FR 32830, 32874 (May 24, 2016). VerDate Sep<11>2014 19:04 Jul 18, 2017 Jkt 241001 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 noncompliance. 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. 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 § 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 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). PO 00000 Frm 00124 Fmt 4701 Sfmt 4700 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 DoddFrank 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 § 1040.3(a)(1)) and have a similar impact on the consumer and his or her wellbeing.869 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 § 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 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 selfpropelled 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). 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 E:\FR\FM\19JYR2.SGM 19JYR2 Federal Register / Vol. 82, No. 137 / Wednesday, July 19, 2017 / Rules and Regulations mstockstill on DSK30JT082PROD with RULES2 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