Dodd Frank strikes again. Banks and credit card companies are up against the clock. Long-favored by courts, pre-dispute arbitration provisions may soon be a thing of the past.

Contending that mandatory arbitration clauses “limit [consumer] options if you have a legal issue with a financial service provider,” the Consumer Financial Protection Bureau (“CFPB”) announced a new rule that would ban such provisions. On July 10, 2017, the CFPB issued a final rule establishing 12 CFR part 1040 to regulate arbitration agreements in contracts for specific consumer financial products and services. In adopting the new rule, the CFPB proclaimed that its goal was to “make it easy for consumers to band together when harmed by a financial service provider.”[1]

The rule targets “consumer financial products and services overseen by the Bureau, including those that lend money, store money, and move or exchange money.”[2] The CFPB notes that Congress already prohibits arbitration agreements in the residential mortgage markets.

The rule is set to take effect 60 days following publication in the Federal Register, and will apply to contracts executed more than 180 days from the effective date. Specifically exempted from the rule are: (i) employers when offering consumer financial products or services for employees as an employee benefit; (ii) entities regulated by the Securities and Exchange Commission or the Commodity Futures Trading Commission, which have their own arbitration rules; (iii) broker dealers and investment advisers overseen by state regulators; and (iv) state and tribal governments that have sovereign immunity from private lawsuits.[3]

Perhaps the CFPB was hopeful Congress would have its collective hands full with the efforts to repeal the healthcare act and enact tax reform, and the rule would pass unnoticed. The new rule, however, was met with immediate opposition. Shortly after the CFPB’s announcement, efforts to thwart the new rule before it could take effect were put into motion.

On July 11, 2017, Sen. Tom Cotton (R-Ark), started the effort to rescind the rule pursuant to the Congressional Review Act, 5 U.S.C. §§ 801-808 (2006)(“CRA”).[4] In his press release, he stated “the [CFPB]'s new rule on arbitration clauses ignores the consumer benefits of arbitration... This morning I've started the process of rescinding this rule using the Congressional Review Act. The last thing Americans need is more anti-business regulation that will prompt frivolous lawsuits while hurting consumers.”[5] Congressman Roger William (R-Tex), joined in this sentiment, stating in a press release, “the CFPB ignored their own study because the results did not fit the narrative they were trying to impose. In order for the Bureau to initiate a new regulation, it must be in the ‘public interest and [created with the objective of protecting our] consumers.’ However, while this arbitration rule claims consumer protection, it will do nothing except cost them more of their hard-earned dollars and time. The CFPB’s own study shows the average consumer receives $5,400 in cash relief when using arbitration as opposed to an inadequate $32 through class action suit.”[6]

The CRA provides for expedited procedures to allow both houses of Congress to pass a resolution of disapproval. Of note, once a rule is rescinded under the CRA, the Act goes on to prohibit the issuance of a new rule in substantially the same form unless specifically authorized by a law enacted after the date of resolution disapproving of the original rule.[7] This preemption aspect of the repeal of the rule should give some comfort to the industry should it come about.

The Dodd-Frank Wall Street Reform and Consumer Protection Act required the CFPB to study the use of mandatory arbitration provisions in consumer financial markets and authorized the Bureau to “issue regulations that are in the public interest, that are for the protection of consumers, and which are based on findings that are consistent with the Bureau’s study of arbitration.” According to the CFPB, arbitration clauses “are not only common and unknown; they are also bad for consumers.” The CFPB believes such clauses allow companies to “deny consumers their day in court, avoid paying out big refunds, and continue harmful practices.”

The promulgation of this rule may be an opening salvo by the CFPB. Currently, broker dealers and investment advisors regulated by the SEC and/or state securities commissions are excluded from coverage of the rule as “providers.”[8] Time will tell if the CFPB will push for further regulation.