On July 10, 2017, the Consumer Financial Protection Bureau (CFPB) announced a new rule that may have significant ramifications for the financial industry. The rule aims to stop a now common feature in financial services contracts: provisions directing customers to private, individual arbitration rather than the courts to settle disputes.
The sweeping rule would ban many financial service companies from using mandatory arbitration clauses in contracts with consumers. The rule does not prohibit such clauses outright, but instead will prevent companies from relying on any arbitration agreement to block a consumer from joining or initiating a class action. The result would be to open the door to class action lawsuits against the vast majority of businesses that extend credit to consumers, including banks, mortgage lenders and servicers, and credit card companies.
In addition, companies will face reporting requirements under the rule for any arbitrations that still happen, either under agreements entered into before the rule becomes effective or for non-class disputes. Parties may then lose the benefit of confidentiality that arbitration can provide. Under the rule, the CFPB would begin posting arbitration data to its public website, starting in July 2019.
Protecting Consumers or an ‘Agency Gone Rogue’?
Congress created the CFPB to protect consumers in the wake of the Great Recession. In doing so, it specifically instructed the CFPB to analyze the effect of arbitration clauses on consumers. This rule is the culmination of those efforts.
In general, the argument against arbitration, and thus in support of the CFPB’s rule, is that it prevents consumers from banding together when it wouldn’t make sense to sue individually. As the CFPB puts the argument in its press release: “By forcing consumers to give up or go it alone – usually over small amounts – companies can sidestep the court system, avoid big refunds, and continue harmful practices.”
On the other hand, arbitration can have many benefits. It often provides an effective, efficient way to resolve a dispute, allowing businesses and consumers to save on legal costs and resolve disputes more quickly. Class actions, on the other hand, often take years to resolve and are criticized as providing a bigger windfall for plaintiffs’ attorneys than to the actual class members. Recent U.S. Supreme Court precedent has recognized federal policy in favor of parties’ decisions to employ arbitration clauses in their contracts.
For these and other reasons, financial industry groups have harshly criticized the rule. The U.S. Chamber of Commerce has gone as far as say that the rule is “a prime example” that the CFPB is “an agency gone rogue.”
Challenges the Rule Will Likely Face
The rule is set to take effect 60 days after publication in the Federal Register, but it will not apply to contracts entered into before the 241st day after publication. It is unlikely to reach those dates without challenge.
Many – including the CFPB – expect that Congress will attempt to use the Congressional Review Act or the “CRA” to stop the rule from taking effect. In fact, the current chairman of the House Financial Services Committee, Jeb Hensarling (R-TX) has already taken the position that, as “a matter of principle, policy, and process, this anti-consumer rule should be thoroughly rejected by Congress under the Congressional Review Act.” Under the CRA, Congress can stop new regulations within 60 days if a majority in both the U.S. House and Senate vote for it and the president does not veto it. Since the CFPB is still led by an Obama appointee, Richard Cordray, it’s possible that Republican majorities in Congress and President Trump will seek to undo the rule.
Another way the sweeping arbitration ban could be challenged is in federal court. Legal challenges could be based on a failure to comply with the Dodd-Frank Act, which provides the authority for CFPB rulemakings, and perhaps other arguments under the Administrative Procedure Act.
Finally, the CFPB’s current director is a holdover from the previous administration. His term is set to end in July 2018, and it has been speculated that he may step down (or possibly be removed by President Trump) before then. If a new director steps in before the rule takes effect, he or she may look to delay the rule’s effective date, make adjustments, or even withdraw it altogether.
Although the rule’s future is uncertain, affected businesses should be thinking about what they need to be doing to prepare should the rule become effective and consult with counsel about their options.