With no progress in Congress repealing the Consumer Financial Protection Bureau’s (CFPB or Bureau) arbitration rule, a coalition of 18 organizations filed suit in Texas federal court seeking to halt implementation of the prohibition on the use of mandatory predispute arbitration clauses.
In July, the CFPB announced a final rule that prohibits banks and other covered providers of specific consumer financial products from incorporating or enforcing predispute mandatory arbitration to the extent that the clause bars class or mass actions. In addition, the Bureau banned those entities from using an agreement with a consumer that provides for arbitration of any future dispute between the parties to prohibit the consumer from filing or participating in a class action concerning the covered consumer financial product or service.
The rule effectively bans predispute arbitration clauses in most covered consumer contracts and forces covered entities to submit certain records to the Bureau, including initial claims and counterclaims, answers, and awards issued in arbitration.
Reaction was swift, with resolutions introduced in both the House and the Senate to nullify the rule using the Congressional Review Act. The House passed H.J. 111 along party lines by a vote of 231 to 190, but the repeal effort has stalled in the Senate.
In reaction to the congressional inaction, industry groups have stepped up to fight. Led by the Chamber of Commerce, the American Bankers Association, the American Financial Services Association, the Consumer Bankers Association and the Financial Services Roundtable, the 18 organizations have challenged the constitutionality and legality of the CFPB’s rule on four grounds.
First, plaintiffs argue that the rule is fatally tainted by the unconstitutional structure of the Bureau itself. Reiterating many of the same contentions found in other litigation asserting the CFPB is unconstitutional, the complaint cites the director’s “extraordinary degree of authority” that insulates him from control by either the president or Congress—a reach that stretches beyond just financial services companies, and a unique system of funding that is separate from regular congressional appropriations.
Second, plaintiffs assert the CFPB runs afoul of the Administrative Procedure Act (APA) because it failed to observe procedures required by law when it adopted the conclusions of a “deeply flawed study.” The Dodd-Frank Wall Street Reform and Consumer Protection Act required the Bureau to study the use of arbitration in consumer financial contracts, specifying that the agency could prohibit or impose limits on the use of arbitration agreement in contracts only if doing so “is in the public interest” and “for the protection of consumers.”
“But the study is flawed in many fundamental respects, and—as a result—the Bureau’s Rule is fatally flawed as well,” according to the complaint. The CFPB did not engage meaningfully with the general public for the majority of the study period and ignored calls from industry as well as members of Congress to provide more transparency into the study process, the groups claim.
“Given the flawed process that produced it, it is unsurprising that the final study was fatally flawed in numerous respects: it used defective methodologies; failed to address key questions; and drew the wrong conclusions from the available data,” the groups allege. “In particular, the study attempted to assess the relative efficacy of arbitration and private class actions as means of resolving consumers’ disputes with financial service providers. But its analysis of each subject is demonstrably incomplete or wrong.”
Third, plaintiffs claim the rule further violates the APA because it runs counter to the record before the Bureau and neglects to take account of aspects of the problem it purported to address. For example, say plaintiffs, the CFPB did not consider whether effectively eliminating arbitration in contracts subject to the Bureau’s jurisdiction would injure consumers, nor did the study address the different factors presented by varying industries and products covered by the rule, subject to divergent statutory structures and differing circumstances.
“The Bureau did not adequately consider the many possible alternatives short of a de facto ban on arbitration to address the issues identified in [the rule],” the suit says, characterizing the rule as arbitrary and capricious.
Finally, the groups allege the rule violates Dodd-Frank by failing to advance either the public interest or consumer welfare. By precluding the use of arbitration, the rule encourages “class action litigation, a procedure that provides substantial rewards to class action lawyers but almost neverproduces meaningful relief for individual consumers,” the complaint argues.
Requesting that the rule be stayed pending judicial review and then vacated and set aside, the plaintiffs argue that the rule will “inflict immediate, irreparable injury” if it takes effect. Providers would be forced to incur “significant” costs to adapt to the new rule, the vast majority of which would not be recoverable, they say.
Consumers would also be injured, forced to pay many of the increased costs indirectly through higher prices, less attractive products and terms of service, and reduced competition. “Indeed, according to the CFPB’s own figures, the Final Rule will cause financial services providers to incur billions of dollars in additional costs over a five-year period as a result of thousands of additional class-action lawsuits,” the groups warn.
To read the complaint in Chamber of Commerce of United States of America v. Consumer Financial Protection Bureau, click here.
Why it matters
As the deadline for the Senate to take action on the resolution to nullify the arbitration rule runs out in mid-November, the lawsuit filed by industry groups may be the best hope for overriding the final rule.