On July 10, 2017, the Consumer Financial Protection Bureau (CFPB) issued its long-awaited and controversial rule prohibiting class action waivers in consumer contracts. Unless Congress uses the Congressional Review Act (CRA) to invalidate the CFPB’s rule within 60 days of its publication in the Federal Register, the ban on class action waivers will go into effect in early 2018, barring other legislative or administrative action. With Congress tied up with major legislative initiatives and the August recess looming, congressional action is far from certain. The CFPB rule, which essentially unravels more than a decade of US Supreme Court decisions enforcing class action waivers in mandatory arbitration provisions, seems destined to produce a surge in class action litigation.
The CFPB issued the rule under section 1028(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which called for a study of “the use of agreements providing for arbitration of any future dispute … in connection with the offering or providing of consumer financial products or services.” Congress also gave the CFPB the power to regulate arbitration agreements, provided that “the findings in each rule shall be consistent with the study conducted.” The CFPB published its study of arbitration agreements in March 2015, in which it concluded that companies employ mandatory arbitration clauses to prevent consumers from challenging “problematic practices” through the “more effective means” of class action litigation. The study was heavily criticized for its methodology, its failure to seek peer review, and its glaring omission of the role of plaintiffs’ attorneys in class action litigation.
The CFPB issued its proposed rule on May 5, 2016, followed by a 90-day comment period. Despite receiving approximately 110,000 public comments, the CFPB’s final rule differs in no material way from the earlier proposed rule. In its 775-page final rule, the CFPB dismissed concerns raised by industry and public commenters that the rule will not, in fact, benefit consumers. The final rule bans class action waivers and requires companies to include in their consumer contracts a provision expressly stating that they cannot use the contract to prevent the consumer from being part of a class action lawsuit. The rule also imposes disclosure requirements on companies that participate in arbitration, essentially eliminating the confidentiality that has become a hallmark of arbitration. The rule does not prohibit mandatory arbitration provisions, but it may ultimately have the same result.
Now that the CFPB has released the final rule, the ball is now in Congress’s court. The surest path to blocking the rule would be under the CRA, which allows both houses to vote to disapprove the rule. Any Congressional resolution would not be subject to Senate filibuster. President Trump would almost certainly sign such a resolution, which would not only terminate this CFPB rule, but also any similar rules the CFPB may attempt to implement in the future. But with health care and tax reform legislation on the table, among other issues, the CFPB appears to be betting that Congress will be too distracted to vote for disapproval between now and early September. Should Congress fail to act under the CRA, the rule will go into effect six months later. The disclosure requirements relating to arbitration will become effective in 2019. The rule will not cover contracts currently in force or those entered into before the rule’s effective date.