On Monday, July 10, 2017, the Consumer Financial Protection Bureau (CFPB) issued a game-changing final rule regarding the use of arbitration clauses in consumer contracts. The Rule is effective 60 days following its publication in the Federal Register and applies only to contracts entered into more than 180 days after that date. The final rule comes as no surprise—as we reported here, here, and here, the Bureau has forecast for more than a year its intentions to engage in this rulemaking.
Most significantly, the Rule accomplishes the following:
- Bans the use of arbitration clauses to bar class actions. The Rule bans covered providers of certain consumer financial products and services from using arbitration clauses to bar consumers from filing or participating in class action lawsuits.
- Requires covered providers to provide the CFPB with records related to their arbitration proceedings. Covered providers that engage in arbitration must provide the CFPB with records relating to initial claims and counterclaims, answers thereto, and awards issued. The CFPB will also collect correspondence covered providers receive from arbitrators regarding (1) determination that an arbitration agreement does not comply with the arbitrator’s “due process or fairness standards”; and (2) dismissal of an action due to a covered provider’s failure to pay required fees.
The CFPB intends to begin publishing this information starting in July 2019 and stated that it will publish additional details of how covered providers should comply. The Bureau stated that gathering and publishing these records will make “the individual arbitration process more transparent” and “enable the CFPB to better understand and monitor arbitration, including whether the process itself is fair.”
Notably, the Rule does not ban the use of clauses to require arbitration of individual actions, but covered providers must include in their agreements specific language to inform consumers that the agreement may not be used to block class action litigation.
The CFPB’s latest regulatory move takes aim at banks and credit card and other covered companies and sets the stage for legal challenges and political battles with Congress and the Trump Administration.
The primary legal question surrounding the Rule’s validity is whether it comports with the Federal Arbitration Act (FAA) and recent Supreme Court rulings that arguably implicitly approve of pre-dispute class-action waivers. For example, in AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 347-48 (2011), the Supreme Court held that the FAA preempted California state law, which deemed such class-action waivers unconscionable in consumer cases. Then, in American Express Company v. Italian Colors Restaurant, 133 S. Ct. 2304, 2309 (2013), the Court rejected the argument that class action litigation is necessary to preserve the opportunity to assert low-value, statutory claims.
In a possible preview of argument in support of the Rule, the CFPB, in its Executive Summary of the Rule, cited its authority under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) to issue regulations that are in the public interest, for the protection of consumers, and based on findings consistent with the Bureau’s study of arbitration. The CFPB also mentioned Congress’s prohibition of arbitration agreements in the residential mortgage market and the Military Lending Act’s prohibition of such agreements in certain forms of credit extended to servicemembers and their families. Yet these examples are acts of Congress.
Critics of the Rule point out that the Rule may contradict the CFPB’s research into arbitration. Dodd-Frank required the CFPB to study the use of mandatory arbitration clauses in consumer financial markets. The CFPB’s study, released in March 2015 and reported on here, arguably indicates that arbitration is often faster, less expensive, and a more effective way for consumers to resolve disputes with companies compared to class action litigation. Of the 562 class actions the CFPB studied, the average cash settlement per consumer was $32.35, and the litigation generally took two or more years. By comparison, the average amount received by a consumer in arbitration was $5,389, and the timeframe for the proceedings averaged two to seven months.
In addition to legal challenges, the Rule may face opposition in Congress. In a July 7 letter, Congressman Jeb Hensarling (R-Tex.), chair of the House Financial Services Committee and longtime CFPB critic, threatened CFPB Director Richard Cordray with possible contempt if the CFPB issued the Rule before supplying the Committee with certain information about the agency’s deliberations and conversations with consumer groups. Moreover, Congress has the power to overturn the Rule within 60 days of finalization under the Congressional Review Act.
President Trump has already taken some action to begin to dismantle parts of Dodd-Frank through Executive Order and Presidential Memoranda signed on April 21. And questions remain about whether President Trump may remove Cordray as the constitutionality of the CFPB’s leadership structure awaits decision in the U.S. Court of Appeals for the District of Columbia. As we reported, the D.C. Circuit granted the CFPB’s petition for rehearing en banc in PHH Corporation v. Consumer Financial Protection Bureau. The court held oral argument on May 24 and has yet to issue an opinion.
Even if President Trump is able to replace Cordray, questions remain about whether his successor could unilaterally stay the compliance date of the Rule. In another recent D.C. Circuit case, Clean Air Council v. Pruitt, the court held that the Environmental Protection Agency (EPA) lacked authority to stay the compliance date of an EPA rule concerning greenhouse gas emissions and vacated the stay. Thus, any new CFPB head may be able to issue a notice of proposed rulemaking to reconsider the Rule, but may not be able to unilaterally stay the Rule’s compliance date.