Pushback Expected on CFPB’s New Arbitration Rule
Despite a threat of contempt charges from House Financial Services Committee Chairman Rep. Jeb Hensarling (R- TX), the Consumer Financial Protection Bureau (CFPB) issued a final rule on July 10th restricting mandatory arbitration clauses and opening more financial services to possible class action lawsuits. At less than 24 hours old, the arbitration rule is already receiving significant condemnation from the American Bankers Association and the U.S. Chamber of Commerce, among others.
In a statement announcing the publication of the final rule, CFPB Director Richard Cordray said,
“By blocking group lawsuits, mandatory arbitration clauses force consumers either to give up or to go it alone – usually over relatively small amounts that may not be worth pursuing on one’s own. Including these clauses in contracts allows companies to sidestep the judicial system, avoid big refunds, and continue to pursue profitable practices that may violate the law and harm large numbers of consumers.”
Senator Elizabeth Warren, the architect of the CFPB, echoed the sentiments of Cordray in a prepared statement yesterday:
“This CFPB rule will allow working families to hold big banks accountable when they’re cheated and help discourage the kinds of surprise fees that consumers hate. In the upcoming months, the US Chamber of Commerce and other big business lobbying groups will go all out to get Republicans in Congress to reverse this rule, so Republicans will have to decide whether to defend the interests of their constituents or shield a handful of wealthy donors from accountability.”
Despite such altruistic motives, the data may not back the sentiment espoused by the Bureau. A 2015 study by the CFPB found that on average consumers received a considerably larger payout in less time through arbitration as compared to class action litigation. Yet through vague arguments of “losing a day in court” and the word count of arbitration clauses, the CFPB nonetheless pressed forward with the rule. Mere hours after the rule was published, Sen. Tom Cotton (R- AR) claimed he had already started the process to rescind the rule via the Congressional Review Act. House Small Business Committee Chairman Steve Chabot (R- OH) also reached out to Cordray about possible violations of the Small Business Regulatory Enforcement Fairness Act during the rulemaking process.
The final rule is scheduled to go into effect 60 days after its publication on July 10th, with arbitration clauses required to comply within 180 days. The rule contains an exemption for tribal governments and their subdivisions (“arms of the tribe”). To impose private suits upon tribes and their lending enterprises would have been a direct abrogation of tribal sovereign immunity, something the Bureau is forbidden from revoking absent an express waiver from a tribe or the clear intent of Congress. There are likely to be numerous legal and Congressional challenges to the CFPB’s arbitration rule in the coming weeks before its effective date.