Though initially celebrated by many, the overturning of the CFPB’s arbitration rule could mean problems down the road for the financial services industry.

  • The CFPB’s rule restricting arbitration clauses has been undone by Congress and the Congressional Review Act.
  • As an initial step, arbitration can be efficient (and less expensive) for both the financial services industry and consumers.
  • The use of the CRA to overturn rules could encourage the CFPB to regulate more by enforcement than by rule-setting.

On Tuesday, October 24, the Senate killed the Consumer Financial Protection Bureau’s rule restricting the use of arbitration clauses by the financial services industry. We have reported on the rule previously here and here. The rule was widely contested by the financial services industry as well as by several financial services trade associations, including the American Bankers Association, as being not for the benefit of consumers and potentially quite expensive for the industry. The House of Representatives had passed a measure to overturn the rule under the Congressional Review Act (CRA) back in July, and the Senate vote this week allowed the full Congress to effectively push back on the CFPB’s aggressive regulation of the financial services industry. (The CRA requires a simple majority vote from both houses, and is rarely invoked.)

Why was the financial services industry so vehement regarding its dislike of the CFPB’s arbitration rule? In redux, without arbitration as at least the first required stop for consumers to address an alleged harm, consumers could be limited to redressing alleged harms they experience in court through small claims of various descriptions (i.e., requiring extensive monitoring and resources by the financial services industry to defend) or through consumer class actions, which often take years to be resolved, and where the resulting payouts from such class actions generally enrich class action attorneys without providing much benefit to consumers. In other words, while arbitration may not be the complete answer for consumer harms, it is efficient (and less expensive) for both the financial services industry and consumers, at least as an initial required first step.

What does this mean for the CFPB going forward? The fact that the full Congress actually succeeded in coordinating and overturning the rule using the CRA could be problematic for the CFPB, with respect to additional rules it puts forward. For example, the CFPB has finalized a rule that would largely overhaul the payday lending industry, and that rule could be subject to a similar overturn by Congress. As a result, the CFPB could find itself in a position of being largely discouraged from promulgating more rules.

But, that result would not necessarily be good news for the financial services industry, as the CFPB still would have its full enforcement authority and could continue down a path of regulating by enforcement, as compared to regulating by rules. The financial services industry has already been critical of the CFPB for seeming to avoid a rules-based form of regulation in favor of using enforcement to effectively regulate similarly situated companies.

As such, the overturn of the arbitration rule could be viewed positively by the financial services industry initially, but could be more of a problem down the road.