Does Dodd-Frank Provide the Seeds to Unravel Concepcion in Consumer Financing Transactions?

The United States Supreme Court's 5–4 decision in AT&T Mobility LLC v. Concepcion, 563 U.S. ____, No. 09-893, slip op. (Apr. 27, 2011), is not even a week old, and companies dealing with consumers (including companies all along the consumer finance spectrum) are rushing to review and revise existing arbitration clauses in standard contracts. Yet, the rush of commentary to date has failed to consider the seeds already planted in Section 1028(a) & (b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act that, read on their face, may allow the Consumer Finance Protection Bureau ("CFPB") a type of regulatory "veto" of the effect of the Supreme Court's decision upon companies engaged in consumer finance. When the CFPB begins its work in earnest following July 21, 2011, the same companies involved in consumer finance that have welcomed Concepcion will need to track the steps being taken by the CFPB and Congress as the CFPB carries out its mandate to study, report on, and possibly promulgate regulations concerning mandatory arbitration provisions in consumer finance contracts.


In Concepcion, the Supreme Court held that states cannot, as a general practice, void as unconscionable all arbitration clauses in consumer contracts that also reject class arbitration. The Court rejected a contrary California rule, see Discover Bank v. Superior Court of Los Angeles, 36 Cal. 4th 148, 113 P.3d 1100 (Cal. 2005), by reasoning that "[r]equiring the availability of classwide arbitration interferes with fundamental attributes of the arbitration and thus creates a scheme inconsistent with the [Federal Arbitration Act, 9 USC §§ 1, et seq. ("FAA"); in particular § 2]," Concepcion, slip op. at *9. The Court concluded that the Discover Bank rule thus fell on federal preemption grounds. Id. at *17-18.         


So why the need for further vigilance? Because Concepcion was decided on federal preemption grounds, the decision would not prohibit another federal law from restricting the enforceability of class-action waivers. The day Concepcion was announced, Senators Al Franken and Richard Blumenthal, along with Representative Hank Johnson, reintroduced the Arbitration Fairness Act, seeking to do precisely that. Assuming the language continues to mirror the 2007 bill (H.R. 3010/S. 1782), the Arbitration Fairness Act would, if passed, amend the FAA to render unenforceable any mandatory arbitration clause for employment, consumer, franchise, or civil rights disputes, as well as any dispute arising under any statute intended "to regulate contracts or transactions between parties of unequal bargaining power." The Arbitration Fairness Act died in committee in 2007, and given the current makeup of Congress, it appears unlikely to pass in the foreseeable political future.


But the Arbitration Fairness Act is not the only probable federal legislative attack upon pre-dispute arbitration provisions that expressly rule out class treatment. A little-noticed provision of Dodd-Frank empowers the newly created CFPB to study mandatory arbitration clauses between consumers and any person or entity "offering or providing a consumer financial product or service," and to report the CFPB's findings to Congress. Pub. L. 111-203, §§ 1002(6), 1028(a). Of course, to the extent the CFPB is being given the authority to examine and report, whatever report is made would still be subject to Congress's normal legislative processes. In the current climate, a report urging that class action waivers be banned from consumer finance contracts (or imposing other restrictions) may well fail to carry both houses of Congress.


However, a regulatory attack upon Concepcion may take place even without the cooperation of both houses of Congress. Section 1028(b) of Dodd-Frank not only directs the CFPB to report, but further states that the "[CFPB], 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 [CFPB] finds that such a prohibition or imposition of conditions or limitations is in the public interest and for the protection of consumers." In short, while Congress considers the CFPB's report, the CFPB may move forward with regulations of its own. These potential regulations may run the gamut from prohibiting pre-dispute arbitration clauses in covered consumer finance contracts altogether, to purporting to prohibit class treatment in contracts that have pre-dispute arbitration provisions (in effect, making the "price" of an arbitration clause to a lender the willingness to potentially be subject to classwide arbitration), to no substantive changes at all. After all, the CFPB's report is not only not in, the study has not begun. Arguments concerning the utility of arbitration to allow redress without substantial legal fees remain strong. Similarly, the CFPB may well recognize that it is one thing to entrust one dispute to arbitrators with virtually no appellate oversight or review, but that doing so in class cases potentially involving millions of consumers is a far different matter. Finally, the extent to which a "regulation" of the CFPB may act as a federal law, and the composition and role of the CFPB itself, present issues that will need to be addressed once the CFPB actively begins its post-July 21, 2011 existence. In short, no matter what the CFPB may ultimately recommend or promulgate, questions will ensue.


Bottom line? At this point, Concepcion continues a series of helpful precedents confirming that the Federal Arbitration Act favors arbitration clauses and will allow parties, in advance of a dispute, to determine what will or will not be submitted to arbitration. While classwide arbitration is one approach, parties may agree in advance not to utilize that approach. However, as the CFPB begins work in earnest following its July 21, 2011 kickoff date, prudent companies involved in consumer financing will need to monitor the CFPB's report process and, especially, any resulting regulatory or rulemaking efforts. 


Jones Day's Consumer Financial Products & Services team advises clients regarding the issues discussed in this Alert, including the ongoing development of arbitration clauses as a result of the Concepcion decision.


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