CFPB Arbitration Rule to ‘Particularly’ Impact Credit Cards, Lawyer Says

The Consumer Financial Protection Bureau’s new arbitration rule issued Monday might have a “particular impact” on revolving credit programs in powersports, David Gemperle, partner at Nisen & Elliott LLC, told Powersports Finance.

The rule bans companies from using arbitration clauses to deny groups of people from organizing class action lawsuits. Financial institutions often have arbitration clauses in their contracts that prevent consumers from joining together to sue their bank or financial company for wrongdoing, according to a CFPB press release.

Credit cards — the revolving credit programs — are subject to technical requirements, such as the Fair and Accurate Credit Transactions Act of 2003, Gemperle said. The act prohibits businesses from printing more than five digits of any customer’s card number or card expiration date on any receipt provided to the cardholder at the point of sale or transaction. These “are not really things that consumers complain about until a plaintiffs’ attorney tells them to,” Gemperle added.

Several revolving credit programs could be affected by the ruling. In May, American Honda Motor Co. partnered with Citi Retail Services to launch the Honda Powersports Revolving Finance Program. Additionally, BRP Inc. teamed up with Citi in January, and Kawasaki Motors Corp. USA announced a multi-year agreement with the revolving credit provider in December of last year. Yamaha Motor Corp. USA launched its own Yamaha Credit Card program through its captive Yamaha Motor Finance Corp. in October of last year.

The ruling has sparked strong opposition from multiple lawyers, financial institutions, and trade groups — including the American Financial Services Association (AFSA). Financial institutions are collectively arguing that this harms consumers because the ruling will benefit lawyers who put together class action lawsuits, rather than the consumers who form the class action, as lawyers typically take a substantial percentage of any settlement.

“Industry participants have questioned and criticized the rule since it was first proposed in May 2016,” said Mary Calkins, partner at Akerman LLP. “For example, dealers have expressed concern that although not subject to the rule, they will feel a significant cost impact since indemnification clauses in dealer/lender contracts would obligate dealers to reimburse the lenders’ cost of increased lawsuits. Credit unions, too, are concerned they may bear increased burden of class actions due to conduct on the part of dealers who contract with such credit unions for indirect auto lending.”

On the other end, consumer advocates argue that many of these affected borrowers don’t have the means to pursue legal action on their own.

“By blocking group lawsuits, mandatory arbitration clauses force consumers either to give up or to go it alone — usually over relatively small amounts that may not be worth pursuing on one’s own,” CFPB Director Richard Cordray said in a statement. “Including these clauses in contracts allows companies to sidestep the judicial system, avoid big refunds, and continue to pursue profitable practices that may violate the law, and harm large numbers of consumers.”

“One thing we are watching is how the Congressional Review Act process will come into play,” John Redding, partner at Buckley Sandler LLP, told Powersports Finance. “There is certainly a lot of interest on the part of industry in seeing this particular rule set aside, and it will be interesting to see whether the Republicans are willing to take this up and can pull together the simple majority required to issue the joint resolution of disapproval. If they are able to pull it off, this rule will be dead.”

The rule will take effect in two months and applies to contracts entered into six months later, Calkins said. “Under the Congressional Review Act, Congress could exercise fast-track legislative authority to overturn the Rule within 60 days of finalization, then the president can sign or veto the bill,” she added.

Gemperle, Calkins, and Redding will participate in a “Regulatory Compliance Update” panel at PowerSports Finance 2017 where they will offer lessons in proactive regulatory compliance. To learn more — or to register — for this year’s event, visit the PowerSports Finance 2017 homepage here. The full agenda can be viewed here.

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