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Update: The CFPB’s Proposed Arbitration Rule—Dead or Alive?



Update (August 28, 2017): A lot has happened since our original post on the CFPB's arbitration rule, and more is on the way. The CFPB's arbitration rule is definitely alive and breathing, for the time being:

  • The CFPB published its long-awaited arbitration rule on July 19, which, as discussed in more depth below, regulates arbitration agreements in contracts for certain consumer financial products or services (such as contracts involving deposit and savings accounts, credit cards, student loans, automobile leases, etc.).
  • In response - and only six (6) days after the rule's publication - the House of Representatives voted to disapprove the CFPB's rule, using its authority under the Congressional Review Act. The House's vote to repeal passed by a 231-190 vote.
  • The vote to stop the CFPB's rule now moves its way to the Senate. While a resolution to disapprove the CFPB's rule has been introduced in the Senate, it is not expected that a vote will occur until at least September 5 when the Senate returns from recess. Under the Congressional Review Act, the Senate has 60 days from the CFPB rule's publication date (July 19, 2017) to pass its disapproval resolution.
  • If the Senate also votes to disapprove the CFPB's rule, the fate of the CFPB's rule would lie in the hands of President Trump. Interestingly, on July 24, the White House issued a statement indicating that the Administration strongly supports disapproval of the CFPB's rule. In fact, the Statement indicated that "if [the House's disapproval resolution] were presented to the President in its current form, his advisors would recommend that he sign it into law." Frankly, if the resolution to disapprove the CFPB's arbitration rule makes it to President Trump's desk, it seems likely that he will side with both chambers of Congress and also disapprove the CFPB's arbitration rule.

Financial institutions should keep an eye on the status of the CFPB’s arbitration rule and act accordingly when the dust settles. More to come.

Original (June 1, 2017): The banking and legal communities have been holding their breath to see what action the Consumer Financial Protection Bureau (CFPB) will take to curb certain mandatory arbitration clauses in consumer contracts. More than a year ago, the CFPB sought comments from the public on a proposed rule that would prohibit a specific type of arbitration clause in consumer financial contracts (e.g., contracts involving deposit and savings accounts, credit cards, student loans, automobile leases, etc.). During this public comment period, many bankers have argued that the arbitration process is an efficient way to resolve cases out of court, more quickly, and without the outrageous expenses associated with a traditional court case.

At this point, you might be asking yourself: If arbitration is so widely praised due to its efficiency, why would the CFPB want to prohibit these clauses in consumer contracts? The answer lies in a consumer's ability to bring a class action, or to join in a class action when someone else files it. And the CFPB seems intent on restoring the rights of consumers to join class actions, notwithstanding contractual provisions to the contrary.

As a bit of background, an arbitration clause generally requires that any dispute between a financial institution and a consumer be resolved by a private, neutral third party. This type of clause typically prevents the consumer from a bringing group claim against the financial institution through the arbitration process. These clauses require the injured consumer to individually bring his or her claim against the financial institution, rather than joining with a group of consumers to "gang up" against the financial institution. Some believe this tactic discourages consumer claims against the financial institution, especially if the dollar amount in dispute is low. Meanwhile, some financial institutions argue that class actions encourage the opposite – trumped up claims by an aggressive plaintiff’s bar looking to make a buck, and without concern for the purportedly injured class members those lawyers supposedly represent.

According to CFPB Director Richard Cordray, "[m]any banks and financial companies avoid accountability by putting arbitration clauses in their contracts that block groups of their customers from suing them." In fact, some believe that Wells Fargo used this type of clause as leverage during its recent scandal, in which bank employees opened millions of checking, savings, and credit accounts without customer approval or knowledge. Although Wells Fargo did not choose to enforce its arbitration clause in this situation, a Wells Fargo spokesman stated that "Wells Fargo continues to believe that arbitration is an efficient and effective way to resolve disputes."

Notably, the CFPB's proposed rule would not completely prohibit arbitration. Rather, the rule would require arbitration clauses to expressly state that they cannot be used to stop consumers from being part of a class action in court. The CFPB believes that this rule would ultimately benefit consumers by having a deterrent effect on unlawful activities. However, a number of opponents to the CFPB's rule have argued that there is no need for class actions if those unlawful practices are already subject to a supervisory or enforcement action by the CFPB itself.

As mentioned above, the CFPB initially sought comments on its proposed rule more than a year ago, and it expected to publish its final rule in February of 2017. So, what's taking so long? Well, according to the Wall Street Journal, the CFPB was flooded with nearly 13,000 comments both in favor and against the rule. To complicate matters, the future of the CFPB was recently thrown into uncertainty due to the Trump administration and a legal challenge to the CFPB's leadership structure (which is currently on appeal and expected to go to the U.S. Supreme Court). Plus, a bill that could potentially overhaul the Dodd-Frank Act (which created the CFPB) is set for the House floor the week of June 5, 2017. In light of this volatile political and legal environment, many question whether the anti-arbitration rule will ever see the light of day.

If the CFPB eventually publishes its final rule, that is only the beginning. Notably, Congress would have the power to set aside the CFPB's rule by exercising its powers under the 1996 Congressional Review Act (the "CRA"). In short, the CRA allows Congress to repeal a federal regulation by a majority vote in each house with the President's signature. Before President Trump took office, the CRA had been used only once in its 21-year history. As of May 1, 2017, President Trump and the Republican-controlled Congress used the CRA thirteen times to set aside rules created near the end of Barack Obama's presidency. Importantly, if a rule is set aside under the CRA, it can be the "kiss of death" for that rule - no substantially similar rule can be issued in the future without specific authorization from Congress. In other words, the CFPB would effectively be handcuffed and unable to issue a similar anti-arbitration rule until Congress expressly allowed the CFPB to do so (which seems very unlikely). Many believe that this could be the reason we have not yet seen (and may never see) a final anti-arbitration rule from the CFPB.

Put bluntly, the CFPB's proposed anti-arbitration rule is a big deal, and if it is finalized it will have a major impact on financial institutions. For now, financial institutions can continue to include mandatory arbitration language in contracts with consumers. However, if the CFPB eventually publishes its final rule, financial institutions will need to act promptly to revisit their policies and the language used in affected contracts. For now, we can only keep our ears to the ground, await the results of the clash between the CFPB and President Trump, and to react quickly to any changes to the permissibility of these class action waivers.

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