By now you’ve heard that the Senate has killed the Consumer Financial Protection Bureau’s (CFPB’s) arbitration rule. Following on the heels of an earlier thumbs-down vote of the House of Representatives, the Senate yesterday voted by the narrow margin of 51-50 to override the arbitration rule promulgated by the CFPB. As we reported back in August, we expected Congress to employ a powerful tool in its arsenal, the Congressional Review Act, to prevent implementation of the rule. With the Senate action (secured only by the tie-breaking vote of Vice President Pence), the rule will not go into effect. Had the rule been implemented, banks and other covered providers of specified consumer financial products would have been prohibited from incorporating or enforcing predispute mandatory arbitration to the extent that the clause barred “group” lawsuits (that is, class or mass actions), and would likewise have banned those entities from using with a consumer an agreement 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.
But are arbitrations bad for consumers? The Federal Arbitration Act broadly encourages arbitration, and multiple Supreme Court opinions have supported arbitration as a less expensive forum for dispute resolution. And yet, in the past decade, Congress has addressed mandatory arbitration in a few key areas. For example, in 2007, Congress passed the Military Lending Act, which disallows mandatory arbitration clauses in connection with certain loans made to service members. Three years later, in the Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress barred mandatory arbitration clauses in most residential mortgage contracts.
Dodd-Frank took one further step, however. It required the CFPB to study mandatory arbitration for all consumer financial products and services. In doing so, Congress expected the study to lead to a rule-making, as long as the study suggested a need for reform. Congress therefore authorized the CFPB to promulgate regulations to limit or prohibit the use of predispute arbitration clauses, but only if such a rule would be (1) in the public interest, (2) for the protection of consumers and (3) consistent with findings from the CFPB study. When that study was completed, the CFPB claimed it was “the most comprehensive study of mandatory arbitration clauses ever undertaken,” but numerous industry groups have rejected its conclusions, relying in part on the very findings on which the CFPB likewise relies. Its proposed rule reflected a notable bias against arbitration, leading to thousands of industry comments. To no one’s surprise, the CFPB then announced the final rule in July 2017, largely ignoring numerous industry comments objecting to the proposed rule. In reaction, the House of Representatives quickly voted to override the rule. That said, without the Senate’s support, the House action was just a first step, as both houses needed to act in order to override the final rule.
With this action by the Senate, the arbitration rule is dead, at least for now. Under the Congressional Review Act, not only is the CFPB barred from promulgating the rule, but likewise the rule may not be re-promulgated in substantially the same form without an enactment of Congress after the date of the resolution of disapproval. And during a GOP-controlled Congress, that action is highly unlikely. The CFPB does have options—for example, it could adopt a substantially different rule that still bans predispute mandatory arbitrations in some form, or it could create other disincentives to arbitration by requiring the publication of detailed data concerning arbitration claims and results.
We do not expect the CFPB to give up the battle, and the Bureau may have already prepared a Plan B as a result of the earlier House vote to nix the rule. That said, there may be little time to take action, especially if Director Cordray leaves for greener pastures and a run for the governorship in Ohio. Stay tuned.
For further information, please contact the author or any member of the financial services group.