Official Interpretations (CFBP Arbitration Rule)

When the Consumer Financial Protection Bureau (CFPB) released its final rule on pre-dispute arbitration agreements, it also published its official interpretations of the rule. The official interpretations (which are set forth below) are important because courts typically rely on them in interpreting the rule’s requirements.

Click here for the text of the CFPB’s rule on pre-dispute arbitration agreements (12 C.F.R. Part 1040).

Section 1040.2—Definitions

1. Scope of the term includes agreements with covered persons that are not providers.
1. While § 1040.2(c) defines “pre-dispute 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.” “Covered persons” as that term is defined in 12 U.S.C. 5481(6) include persons excluded from the Bureau’s rulemaking authority under 12 U.S.C. 5517 and 5519. Therefore, the requirements contained in § 1040.4 would not apply to any such excluded persons entering into a pre-dispute arbitration agreement because they are not “providers,” by virtue of the definition in § 1040.2(d) which excludes persons described in § 1040.3(b) including its paragraph (b)(6) (under which any person is excluded under § 1040.3(b) to the extent it is not subject to the Bureau’s rulemaking authority including under sections 1027 or 1029). The requirements in § 1040.4 could apply, however, to the use of any such pre-dispute arbitration agreement by a different person that meets the definition of provider in § 1040.2(d), when the pre-dispute arbitration agreement was entered into after the compliance date.
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2. For example, an automobile dealer that extends consumer credit is a covered person under 12 U.S.C. 5481(6). Its pre-dispute arbitration agreement would therefore fall within the scope of the definition in § 1040.2(c). However, an automobile dealer 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 dealers 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, when the agreement was entered into after the compliance date.
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2. Delegation provisions. The term pre-dispute arbitration agreement as defined in § 1040.2(c) includes delegation provisions. Delegation provisions are agreements to arbitrate threshold issues concerning a pre-dispute arbitration agreement, and may sometimes appear elsewhere in a contract containing or relating to the arbitration agreement.
3. Form of pre-dispute arbitration agreements. A pre-dispute arbitration agreement for a consumer financial product or service includes any agreement between a covered person and a consumer providing for arbitration of any future disputes between the parties concerning a consumer financial product or service described in § 1040.3(a), regardless of the form or structure of the agreement. Examples include a standalone pre-dispute arbitration agreement that applies to a product or service, as well as a pre-dispute arbitration agreement that is included within, annexed to, incorporated into, or otherwise made a part of a larger agreement that governs the terms of the provision of a product or service.

1. Providers of multiple products or services. A provider as defined in § 1040.2(d) that also engages in offering or providing products or services not covered by § 1040.3 must comply with this part only for the products or services that it offers or provides that are covered by § 1040.3. For example, a merchant that transmits funds for its customers as a general service, when that funds transmittal activity is not necessary to its offering or provision of products or services that are not covered by this part, would be covered pursuant to § 1040.3(a)(7) with respect to the transmittal of funds. That same merchant generally would not be covered with respect to the sale of durable goods to consumers, however, except when extending consumer credit in certain circumstances as provided in 12 U.S.C. 5517(a)(2)(B)(ii) or (iii).
2. Affiliated service providers. Section 1040.2(d)(2) defines the term “provider” to include an affiliate of another provider as defined in § 1040.2(d)(1) when the affiliate is acting as a service provider to the other provider consistent with 12 U.S.C. 5481(6)(B). The rule applies to such an affiliated service provider in connection with the offering or provision of a covered consumer financial product or service by the other provider, even when the affiliated service provider is not itself directly engaged in offering or providing a consumer financial product or service covered by § 1040.3(a). However, 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 thus is not a provider, the affiliated service provider still could be a 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 may, in its own right, be “servicing an extension of consumer credit covered by paragraph (a)(1)(i) of this section” as discussed in § 1040.3(a)(1)(v). As a result, the affiliate servicer may meet the definition of provider in § 1040.2(d)(1) even though the merchant is not a provider.

Section 1040.3—Coverage and exclusions from coverage

1. Consumer financial products or services pursuant to 12 U.S.C. 5481(5). Section 1040.3(a) provides that the products or services listed therein are covered by part 1040 when they are consumer financial products or services as defined by 12 U.S.C. 5481(5). Products or services generally meet this definition in either of two ways: they are offered or provided for use by consumers primarily for personal, family, or household purposes, or they are delivered, offered, or provided in connection with the first type of consumer financial products or services. An example of the second type of consumer financial product or service is debt collection, when the underlying loan that is the subject of collection is a consumer financial product or service.
2. Mobile phone applications and online access tools. If a provider of a consumer financial product or service covered by this part offers or provides a consumer a technological means for accessing information about that product or service, such as a mobile phone application or an internet website, this part shall apply to the application or internet website as it concerns that product or service.

1. Offering or providing creditor referral or selection services. Section 1040.3(a)(1)(iii) includes in the coverage of part 1040 providing referrals or selecting or offering to select creditors for consumer credit consistent with the meaning in 12 CFR 1002.2(l) by a creditor as defined in 12 CFR 1002.2(l). Section 1040.3(a)(1)(iii) does not apply when such a creditor’s referral or selection activity is incidental to its business activity not covered by this section. See § 1040.3(a)(1)(iii)(C). For example, a merchant may regularly and in the ordinary course of its business provide creditor referrals or selection services to help a consumer pay for nonfinancial goods or services sold by that merchant. By virtue of such activities, such a merchant may be a creditor as defined in 12 CFR 1002.2(l). Nonetheless, such a merchant would not be covered by § 1040.3(a)(1)(iii) because its creditor referral or selection services are incidental to its sale of goods or services not covered by this section.

1. Servicing of credit. Section 1040.3(a)(1)(v) includes in the coverage of part 1040 servicing of extensions of consumer credit covered by § 1040.3(a)(1)(i). Servicing of extensions of consumer credit includes, but is not limited to, student loan servicing as defined in 12 CFR 1090.106 and mortgage loan servicing as defined in 12 CFR 1024.2(b).

1. Debt relief products and services. Section 1040.3(a)(3)(i) includes in the coverage of part 1040 services that offer to renegotiate, settle, or modify the terms of a consumer’s debt. Providers of these services would be covered by § 1040.3(a)(3)(i) regardless of the source of the debt, including but not limited to when seeking to relieve consumers of a debt that does not arise from a consumer credit transaction as described by § 1040.3(a)(1)(i) or from a consumer financial product or service more generally.

1. Credit repair products or services. Section 1040.3(a)(3)(ii) includes in the coverage of part 1040 products or services represented to remove derogatory information from, or improve, a person’s credit history, credit record, or credit rating. The description of these products and services in § 1040.3(a)(3)(ii) is generally based upon the coverage of credit repair goods or services in regulations implementing 15 U.S.C. 6101 et seq., codified at 16 CFR 310.4(a)(2). However, part 1040 also would apply even if such credit repair goods or services would not be covered under the regulations implementing 15 U.S.C. 6101 et seq., codified at 16 CFR 310.4(a)(2), solely because they were not the subject of telemarketing as defined in 16 CFR 310.2(gg).

1. Credit card and charge card transactions. Section 1040.3(a)(8) includes in the coverage of part 1040 certain payment processing activities involving the initiation of credit card or charge card transactions. The terms “credit card” and “charge card” are defined in Regulation Z, 12 CFR 1026.2(a)(15). For purposes of § 1040.3(a)(8), those definitions in Regulation Z apply.

1. Collection of debt by the same person arising from covered and noncovered products and services. Section 1040.3(a)(10)(i) includes in the coverage of part 1040 the collection of debt by a provider that arises from its providing any of the products and services described in paragraphs (a)(1) through (9) of § 1040.3, including, for example, an extension of consumer credit described in § 1040.3(a)(1). If the person collecting such debt also collects other debt that does not arise from any of the products and services described in paragraphs (a)(1) through (9) of § 1040.3, the collection of that other debt is not included in the coverage of § 1040.3(a)(10)(i). For example, if a creditor extended consumer credit to consumers and business credit to other persons, § 1040.3(a)(10)(i) would include in the coverage of part 1040 the collection of the consumer credit but not the collection of the business credit. Similarly, if a debt buyer purchases a portfolio of credit card debt that includes both consumer and business debt, § 1040.3(a)(10)(ii) would include in the coverage of part 1040 only the collection of the consumer credit card debt.
2. Collection of debt by affiliates. Paragraphs (a)(10)(i) and (ii) of § 1040.3 cover certain collection activities not only by providers themselves, but also by their affiliates. The term “affiliate” is defined in 12 U.S.C. 5481(1) as any person that controls, or is controlled by, or is under common control with another person.

1. Exclusion for States under Federal sovereign immunity law. Section 1043.3(b)(2)(ii) excludes States and other persons to the extent they would be an arm of the State under Federal sovereign immunity law and their immunity has not been abrogated by the U.S. Congress. For purposes of this rule, the term State includes any State, territory, or possession of the United States, the District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, Guam, American Samoa, and the U.S. Virgin Islands.
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2. Exclusion for Tribes under Federal sovereign immunity law. Section 1040.3(b)(2)(ii) excludes Tribes and other persons to the extent that they would be an arm of a Tribe under Federal sovereign immunity law and their immunity has not been abrogated by the U.S. Congress. For purposes of this exclusion, the term “Tribe” refers to any federally recognized Indian Tribe, as defined by the Secretary of the Interior under section 104(a) of the Federally Recognized Indian Tribe List Act of 1994, 25 U.S.C. 479a-1(a).

1. Including consumers to whom affiliates provide a product or service toward the numerical threshold for exemption of a person under § 1040.3(b)(3). Section 1040.3(b)(3) provides an exclusion to persons providing a product or service covered by § 1040.3(a) if no more than 25 consumers are provided the product or service in the current and prior calendar years by the person and its affiliates. The exclusion applies based on the frequency with which the product is provided, regardless of the number of times a product is offered. Note, however, that participating in a credit decision with regard to consumer credit in circumstances described in § 1040.3(a)(1)(ii), for example, constitutes providing a product or service covered by § 1040.3(a), even if an application for consumer credit is denied. In addition, for purposes of this test, the number of consumers to whom affiliates of a person provide a product or service is combined with the number of consumers to whom the person itself provides that product or service. The term “affiliate” is defined in 12 U.S.C. 5481(1) as any person that controls, or is controlled by, or is under common control with another person.
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2. Effect of exceeding the numerical threshold for the exemption. If, during a calendar year, a person to that point excluded by § 1040.3(b)(3) for a given product or service described in § 1040.3(a) provides that product or service to a 26th consumer, then that person ceases to be eligible for this exclusion at that time with respect to that product or service. The provider must begin complying with this part with respect to the covered product or service provided to that 26th consumer. In addition, the provider will not be eligible for the exclusion in § 1040.3(b)(3) whenever it offers or provides that product or service for the remainder of that calendar year and the following calendar year.

1. Exemption for merchants who purchase or acquire consumer credit from other merchants who are exempt. Section 1040.3(b)(4)(ii) provides an exemption for a merchant who purchases or acquires consumer credit from another merchant when the merchant from whom the credit is being purchased or acquired is exempt under § 1040.3(b)(4)(i). This exemption in § 1040.3(b)(4)(ii) applies not only to the purchase or acquisition itself, but also to any servicing or collection activities by the merchant purchaser or acquirer.

1. Exemption for employers providing employee benefits. Section 1040.3(b)(5) provides an exemption for an employer to the extent it is offering or providing a consumer financial product or service to an employee as an employee benefit. If an employer offers or provides a consumer financial product or service covered by § 1040.3(a) to an employee on terms and conditions that the employer makes available to the general public, such product or service is not an employee benefit for purposes of § 1040.3(b)(5).

Section 1040.4—Limitations on the Use of Pre-Dispute Arbitration Agreements

1. Enters into a pre-dispute arbitration agreement.
1. Examples of when a provider enters into a pre-dispute arbitration agreement for purposes of § 1040.4 include but are not limited to when the provider:
1. Provides to a consumer, after the date set forth in § 1040.5(a), a new product or service covered by § 1040.3(a) that is subject to a pre-existing agreement to arbitrate future disputes between the parties, and the provider is a party to that agreement, regardless of whether that agreement predates the date set forth in § 1040.5(a). When that agreement predates the date set forth in § 1040.5(a), § 1040.4 applies only with respect to any such new product or service;
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2. Acquires or purchases after the date set forth in § 1040.5(a) a product or service covered by § 1040.3(a) that is subject to a pre-dispute arbitration agreement and becomes a party to that pre-dispute arbitration agreement, even if the seller is excluded from coverage under § 1040.3(b) or the pre-dispute arbitration agreement was entered into before the date set forth in § 1040.5(a); or
3. Adds a pre-dispute arbitration agreement after the date set forth in § 1040.5(a) to an existing product or service.
2. Examples of when a provider does not enter into a pre-dispute arbitration agreement for purposes of § 1040.4 include but are not limited to when the provider:
1. Modifies, amends, or implements the terms of a product or service that is subject to a pre-dispute arbitration agreement without engaging in the conduct described in comment 4-1.i after the date set forth in § 1040.5(a). However, a provider does enter into a pre-dispute arbitration agreement for purposes of § 1040.4 when the modification, amendment, or implementation constitutes the provision of a new product or service. See comment 4-1.i(A).
2. Acquires or purchases a product or service that is subject to a pre-dispute arbitration agreement but does not become a party to the pre-dispute arbitration agreement that applies to the product or service.
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2. Application of section 1040.4 to providers that do not enter into pre-dispute arbitration agreements.
1. Pursuant to § 1040.4(a)(1), a provider that has not entered into a pre-dispute arbitration agreement cannot rely on any pre-dispute arbitration agreement entered into by another person after the compliance date specified in § 1040.5(a) with respect to any aspect of a class action concerning a consumer financial product or service covered by § 1040.3. In addition, pursuant to § 1040.4(b), the provider is required to submit certain specified records concerning claims filed in arbitration pursuant to such pre-dispute arbitration agreements. However, as discussed in comment 4(a)(2)-1, § 1040.4(a)(2) does not apply to providers that do not enter into pre-dispute arbitration agreements.
2. For example, when a debt collector collecting on consumer credit covered by § 1040.3(a)(1)(i) has not entered into a pre-dispute arbitration agreement, § 1040.4(a)(1) nevertheless prohibits the debt collector from relying on a pre-dispute arbitration agreement entered into by the creditor after the compliance date specified in § 1040.5(a) with respect to any aspect of a class action filed against the debt collector concerning its debt collection products or services covered by § 1040.3. The debt collector in this example is subject to § 1040.4(a)(1) even if the creditor was a merchant, government, or other person who was excluded from coverage by § 1040.3(b)(5).

1. Reliance on a pre-dispute arbitration agreement.
1. Examples of conduct that constitutes reliance. Sections 1040.4(a)(1) and (2) both use the term “rely on.” For purposes of these provisions, reliance on a pre-dispute arbitration agreement includes, but is not limited to, doing any of the following on the basis of a pre-dispute arbitration agreement:
1. Seeking dismissal, deferral, or stay of any aspect of a class action;
2. Seeking to exclude a person or persons from a class in a class action;
3. Objecting to or seeking a protective order intended to avoid responding to discovery in a class action;
4. Filing a claim in arbitration against a consumer who has filed a claim on the same issue in a class action;
5. Filing a claim in arbitration against a consumer who has filed a claim on the same issue in a class action after the trial court has denied a motion to certify the class but before an appellate court has ruled on an interlocutory appeal of that motion, if the time to seek such an appeal has not elapsed or the appeal has not been resolved; and
6. Filing a claim in arbitration against a consumer who has filed a claim on the same issue in a class action after the trial court in that class action has granted a motion to dismiss the claim and, in doing so, the court noted that the consumer has leave to refile the claim on a class basis, if the time to refile the claim has not elapsed.
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2. Example of conduct that does not constitute reliance. Reliance on a pre-dispute arbitration agreement for purposes of § 1040.4(a)(1) and (2) does not include, among other things, a class action defendant seeking or taking steps to preserve the defendant’s ability to seek arbitration after the trial court has denied a motion to certify the class and either an appellate court has affirmed that decision on an interlocutory appeal of that motion, or the time to seek such an appeal has elapsed.
2. Protected petitioning conduct. A class action defendant does not violate § 1040.4(a)(1) by relying on a pre-dispute arbitration agreement where it has a genuine belief that it is not subject to this part. For example, a class action defendant does not violate § 1040.4(a)(1) by relying on a pre-dispute arbitration agreement where it has a genuine belief either that it is not covered by the rule because it is not a provider pursuant to § 1040.2(d), or that none of the claims asserted in the class action concern any of the consumer financial products or services covered pursuant to § 1040.3.
3. Class actions concerning multiple products or services. In a class action concerning multiple products or services only some of which are covered by § 1040.3, the prohibition in § 1040.4(a)(1) applies only to claims that concern the consumer financial products or services covered by § 1040.3.

1. Application of section 1040.4(a)(2) to providers that do not enter into pre-dispute arbitration agreements. Section 1040.4(a)(2) sets forth requirements only for providers that enter into pre-dispute arbitration agreements for a covered product or service after the compliance date set forth in § 1040.5(a). Accordingly, the requirements of § 1040.4(a)(2) do not apply to a provider that does not enter into a pre-dispute arbitration agreement with a consumer.
2. Entering into a pre-dispute arbitration agreement that had existed previously between other parties. Section 1040.4(a)(2)(iii) requires a provider that enters into a pre-dispute arbitration agreement that had existed previously as between other parties and does not contain the provision required by § 1040.4(a)(2)(i) or (ii) to ensure the agreement is amended to contain either of those provisions, as applicable, or to provide a written notice to any consumer to whom the agreement applies. This could occur, when, for example, Bank A is acquiring Bank B after the compliance date specified in § 1040.5(a), and Bank B had entered into pre-dispute arbitration agreements before the compliance date specified in § 1040.5(a). If, as part of the acquisition, Bank A enters into the pre-dispute arbitration agreements of Bank B, Bank A would be required either to ensure the account agreements were amended to contain the provision required by § 1040.4(a)(2)(i) or the alternative permitted by § 1040.4(a)(2)(ii), or to provide the notice specified in § 1040.4(a)(2)(iii)(B). See comment 4-1 for examples of when a provider enters into a pre-dispute arbitration agreement.
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3. Notice to consumers. Section 1040.4(a)(2)(iii) requires a provider that enters into a pre-dispute arbitration agreement that does not contain the provision required by § 1040.4(a)(2)(i) or (ii) to either ensure the agreement is amended to contain a specified provision or to provide any consumers to whom the agreement applies with written notice. The notice may be provided in any way that the provider communicates with the consumer, including electronically. The notice may be provided either as a standalone document or included in another notice that the customer receives, such as a periodic statement, to the extent permitted by other laws and regulations.
4. Contract provision for a delegation provision. If a provider has included in its pre- dispute arbitration agreement the language required by § 1040.4(a)(2), and the provider’s pre- dispute arbitration agreement contains a delegation provision, the provider must also separately insert the language required by § 1040.4(a)(2) into the delegation provision, except under § 1040.4(a)(2)(iv)(C). Under § 1040.4(a)(2)(iv)(C), the provider need not also include the language required by § 1040.4(a)(2) within a separate delegation provision—the language can be included once and applies to both the pre-dispute arbitration agreement and the delegation provision.

1. Submission by entities other than providers. Section 1040.4(b) requires providers to submit specified arbitral and court records to the Bureau. Providers are not required to submit the records themselves if they arrange for another person, such as an arbitration administrator or an agent of the provider, to submit the records on the providers’ behalf. The obligation to comply with § 1040.4(b) nevertheless remains on the provider, and thus the provider must ensure that the person submits the records in accordance with § 1040.4(b).
2. Redaction by entities other than providers. Section 1040.4(b)(3) requires providers to redact records before submitting them to the Bureau. Providers are not required to perform the redactions themselves and may arrange for another person, such as an arbitration administrator, or an agent of the provider, to redact the records. The obligation to comply with § 1040.4(b) nevertheless remains on the provider and thus the provider must ensure that the person redacts the records in accordance with § 1040.4(b).

1. Determinations that a pre-dispute arbitration agreement does not comply with an arbitration administrator’s fairness principles. Section 1040.4(b)(1)(ii) requires submission to the Bureau of any communication the provider receives related to any arbitration administrator’s determination that the provider’s pre-dispute arbitration agreement entered into after the date set forth in § 1040.5(a) does not comply with the administrator’s fairness principles or rules. The submission of such records is required both when the determination occurs in connection with the filing of a claim in arbitration as well as when it occurs if no claim has been filed. However, when the determination occurs with respect to a pre-dispute arbitration agreement that the provider has not entered into with any consumers, submission of any communication related to that determination is not required. For example, if the provider submits a prototype pre-dispute arbitration agreement for review by the arbitration administrator and never includes it in any consumer agreements, the pre-dispute arbitration agreement would not be entered into and thus submission to the Bureau of communication related to a determination made by the administrator concerning the pre-dispute arbitration agreement would not be required.
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2. Examples of fairness principles, rules, or similar requirements. Section 1040.4(b)(1)(ii) requires submission to the Bureau of records related to any administrator’s determination that a provider’s pre-dispute arbitration agreement violates the administrator’s fairness principles, rules, or similar requirements. What constitutes an administrator’s fairness principles, rules, or similar requirements should be interpreted broadly. Examples of such principles or rules include, but are not limited to:
1. The American Arbitration Association’s Consumer Due Process Protocol; or
2. JAMS Policy on Consumer Arbitrations Pursuant to Pre-Dispute Clauses Minimum Standards of Procedural Fairness.

1. Reliance on a pre-dispute arbitration agreement. Section 1040.4(b)(1)(iii) requires that a provider shall submit to the Bureau certain submissions in court that rely on a pre-dispute arbitration agreement entered into after the compliance date set forth in § 1040.5(a) with respect to certain aspects of a case concerning any of the consumer financial products or services covered by § 1040.3.
2. A submission does not rely on a pre-dispute arbitration agreement, for purposes of § 1040(b)(1)(iii), if it:
1. Objects to or seeks a protective order intended to avoid responding to discovery;
2. Is only referred to in an answer to a complaint or a counterclaim; or
3. Is only incidentally part of an attachment to a submission. For instance, if a motion attaches the entire consumer financial contract, including the pre-dispute arbitration agreement, but the motion does not cite or rely on the pre-dispute arbitration agreement, the provider is not required to submit the motion to the Bureau.

Section 1040.5—Compliance Date and Temporary Exception

1. Application of § 1040.4(a)(1) to providers of general-purpose reloadable prepaid card agreements. Where § 1040.4(a)(2) does not apply to a provider that enters into a pre-dispute arbitration agreement on or after the compliance date by virtue of the temporary exception in § 1040.5(b)(2), the provider must still comply with § 1040.4(a)(1).

1. Examples. Section 1040.5(b)(2)(ii) requires a provider that has the ability to contact the consumer in writing to provide an amended pre-dispute arbitration agreement to the consumer in writing within 30 days after the issuer has the ability to contact the consumer. A provider is able to contact the consumer when, for example, the consumer registers the card and gives the provider the consumer’s mailing address or email address.

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