Will the CFPB’s Arbitration Rule Survive?

Financial Services Law

As previously reported, the Consumer Financial Protection Bureau (CFPB) released its new rule prohibiting the use of mandatory arbitration clauses that foreclose group lawsuits. But will the rule survive?

What happened

As previously reported, the final rule prohibits banks and other covered providers of specific consumer financial products from incorporating or enforcing predispute mandatory arbitration to the extent that the clause bars class or mass actions. In addition, the CFPB banned those entities 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.

Pursuant to the rule—which permits companies to include arbitration clauses in their contracts as long as they do not prohibit group action—covered entities would also be required to submit certain records to the CFPB, including initial claims and counterclaims, answers, and awards issued in arbitration.

Reaction to the 775-page publication was swift. Resolutions were introduced in both the House and the Senate to nullify the rule using the Congressional Review Act (CRA). The statute permits the repeal of an agency rule if both branches of Congress pass a resolution of disapproval by a simple majority vote within 60 legislative days of the rule’s finalization.

In the House, Rep. Keith Rothfus (R-Penn.) sponsored H.J. 111, which states: “Congress disapproves the rule submitted by the Bureau of Consumer Financial Protection relating to ‘Arbitration Agreements’ … and such rule shall have no force or effect.” The identical bill in the Senate, S.J. Res. 47, was backed by Senate Banking Committee Chair Mike Crapo (R-Idaho), and is currently pending in the Committee on Banking, Housing, and Urban Affairs.

“The rule is based on a flawed study that leading scholars have criticized as biased and inadequate, noting that it could leave consumers worse off by removing access to an important dispute resolution tool,” Sen. Crapo said in a statement about the resolution. “Given the problems with the study and the Bureau’s failure to address significant concerns, it is not only appropriate but incumbent on Congress to vote to overturn this rule.”

Voting along party lines, the House of Representatives passed the bill by a vote of 231 to 190. In support of the resolution, the White House issued a Statement of Administration Policy praising the effort to repeal, which “would protect consumer choices by eliminating a costly and burdensome regulation and reining in the bureaucracy and inadvisable regulatory actions of the CFPB. … If H.J. Res. 111 were presented to the President in its current form, his advisors would recommend that he sign it into law.”

Lawmakers were not alone in their opposition. Acting Comptroller of the Office of the Comptroller of the Currency (OCC) Keith Noreika has exchanged multiple letters with CFPB Director Richard Cordray, fruitlessly requesting a delay in publication of the final rule so that the OCC could review the CFPB’s data and method to “fulfill its safety and soundness obligations.”

A coalition of industry groups, including the American Bankers Association, the Consumer Bankers Association, the U.S. Chamber of Commerce and the Financial Services Roundtable, also spoke out against the rule. “The CFPB’s rule severely undermines the ability of our organizations to continue to offer this convenient, simple, and efficient dispute resolution process to our customers,” the groups wrote, encouraging the congressional resolutions.

Complicating the issue is a recent news report that a major bank may have forced hundreds of thousands of customers to pay for auto insurance that was unnecessary. There are multiple reports, including from the American Banker, that the story has harmed the repeal effort for the simple reason that most of the subject customers are bound by arbitration provisions that preclude class action relief for these alleged practices.

To read the CFPB’s rule, click here.

To read H.J. Res. 111, click here.

To read S.J. Res. 47, click here.

To read the letter from industry groups to Congress, click here.

To read the Acting Comptroller’s letter to the CFPB, click here.

Why it matters

The arbitration rule would vastly expand class action filings, so congressional action will meaningfully impact the future of such litigation. Although the House has already passed its resolution, a Senate vote is not expected until September. Republicans have a 52 to 48 majority in the Senate, but multiple Republican Senators reportedly have yet to decide how they will vote, leaving the future of the repeal efforts—and the CFPB’s arbitration rule itself—uncertain.



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