This past May, the Consumer Financial Protection Bureau (CFPB) published its proposed rules for arbitration agreements in consumer financial transactions. It proposed the new rules after conducting a study that many outside of government and consumer advocacy groups found faulty, both in reasoning and conclusion.
The CFPB claims that consumers are unable to address perceived wrongs through arbitration. This is because the majority of those perceived wrongs are too small for a single person to spend the time or money to seek recovery.
As is customary, the CFPB ignored input from the financial industry. Yes, the folks who actually loan money to consumers—and take the associated risk.
Instead, the bureau proceeded with a rule that, while allowing consumer arbitration agreements, precludes any provision that bars consumers from joining or initiating a class action lawsuit.
Eventually, the new rule will make plaintiffs’ class action lawyers very happy and wealthy. Consumers who have been “harmed,” however, will be left to follow complicated instructions to:
- Determine whether they are part of a class action;
- Analyze whether they are better off filing their own action or joining the class; and
- Figure out how to claim their $2.99 gift card from the class settlement while the class action attorneys split multimillion dollar paydays.
The CFPB and other regulatory agencies like class action lawsuits. In the grand scheme of things, class actions provide little benefit for individual consumers, but are a free enforcement arm for the government.
Thus, the proposed arbitration rule will become final, because historically the agency makes no changes based upon industry input.
Upon the effective date of the rule, entities may not rely in any way on an arbitration agreement that limits a consumer’s right to either file or participate in a class action related to a consumer financial product.
The rule further explains that in all other respects, an arbitration clause may be used, but includes overly burdensome reporting requirements on financial institutions. This makes make such agreements impracticable.
The proposed rule is not applicable to dealers who are predominantly engaged in the sale and servicing of motor vehicles, and who routinely assign retail installment agreements to an unaffiliated third-party finance or leasing source.
So, why should a franchised auto dealer care about the arbitration changes?
Despite exclusion from the CFPB’s direct jurisdiction, most franchised dealers will be indirectly affected by the rule. This is because arbitration language found in installment agreements approved by finance sources will disappear, or be modified to preclude language limiting class action participation.
Given the requirements of the pending rule, smart money says finance companies will simply do away with arbitration clauses in consumer installment agreements altogether, rather than limiting the language and participating in extensive and costly reporting requirements for consumer arbitrations.
How do you protect your dealership going forward?
How to get ready
First, for dealerships not located in a “one document” state, make sure you have an arbitration clause between you—the dealer—and the customer that is separate and apart from the retail installment agreement being assigned. The dealership arbitration clause may be placed clearly and conspicuously in your buyers order, or in a stand-alone agreement.
Next, the language in the agreement should not be pro-seller, nor make it a financial burden for consumers to arbitrate.
Finally, make sure the arbitration agreement, whether in a separate document or as part of the buyers order, is signed by all parties to the agreement. That means all buyers and an authorized signature by the dealership.
Because of the CFPB’s elimination of predispute class action waivers, strongly consider using a contractual jury waiver in your agreements. By agreeing to a jury waiver, consumers waive their right to proceed before a jury, but maintain the right to have their case decided by a state or federal judge in the judicial system.
A knowing jury waiver is allowed in most states, and is reviewed by the courts on a case-by-case basis. In the majority of consumer cases brought against a dealership, lawyers defending the case would rather present the case to a judge than a jury. This has been my experience in more than 25 years of litigation.
Because the arbitration clause—as known by many dealers who have relied upon it in retail installment agreements—will go away, get proactive and assess what alternative options you have available to protect your business.
Start by looking at your current documents, and sit down with the lawyer who litigates your consumer claims. Yes, talk with the lawyer that must rely on your documents in court, not your corporate attorney or CPA. Determine whether you can use a separate arbitration agreement, include a jury waiver in your agreements, or both.
In contrast, jurors have no problem spending other people’s money and awarding consumers amounts far over actual damages incurred in auto dealership cases. In addition, a bench trial before a judge is much less time consuming and expensive than one before a jury.
Contrary to the way government sees it, protecting your business does not insulate you from paying for mistakes. It does, however, protect you from having to pay awards that have no basis in reality.
David R. Missimer, [email protected], is general counsel for Automotive Compliance Consultants Inc. He spent 28 years in private practice as a litigator representing lenders, auto dealers, and numerous other entities and individuals. He has worked with dealership compliance issues since 2003 as co-founder of ACC. He is a member of the National Association of Dealer Counsel, American Financial Services Association, and National Automotive Finance Association.0