Posted on 04/05/2017 at 08:34 AM by John Lande
In May 2016, the Consumer Financial Protection Bureau (“CFPB”) proposed new rules that limit financial institutions’ use of arbitration clauses in consumer contracts. After proposing the rules, the CFPB sought comment from business and industry. However, the rules now face an uncertain future.
To understand the current uncertainty, we have to go back to the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). Under Dodd-Frank, Congress required the CFPB to prepare a study on the use of arbitration clauses in consumer contracts. Dodd-Frank also empowered the CFPB to issue rules to curb or eliminate the use of arbitration clauses in consumer contracts if the CFPB reached an evidence-based conclusion that arbitration is harmful to consumers.
In 2015, the CFPB released its arbitration study where the CFPB was critical of the proliferation of arbitration clauses. The CFPB was particularly critical of arbitration clauses that include class action waivers. The CFPB noted that consumers generally received less relief in arbitration proceedings than in court cases, and that in general most consumers were unaware they were bound by arbitration clauses. The CFPB’s director, Richard Cordray, summarized the findings: “Our study found that these arbitration clauses restrict consumer relief in disputes with financial companies by limiting class actions that provide millions of dollars in redress each year.”
Based on the 2015 study, the CFPB’s May 2016 rules have two primary purposes: (1) eliminating the use of arbitration clauses that waive class action litigation; and (2) collecting additional data on the use of arbitration clauses in consumer financial contracts.
The rules accomplish the first goal with a simple prohibition: unless another law would bar a class from being certified, an arbitration clause in a consumer financial contract cannot be used to prohibit class actions. This rule has the effect of preserving the right of individual consumers to bring a class action in arbitration or court, depending on the circumstances.
Further, to avoid any doubt or chilling effect, the rules require the following disclaimer in any contract that includes an arbitration clause:
We agree that neither we nor anyone else will use this agreement to stop you from being part of a class action case in court. You may file a class action in court or you may be a member of a class action even if you do not file it.
The rules accomplish the second goal by requiring financial institutions that choose to include arbitration clauses to submit data to the CFPB regarding arbitration proceedings. Institutions that include these clauses will have to report: (1) any arbitration claims filed, (2) a copy of the arbitration agreement, (3) the award or judgment resulting from an arbitration, (4) if an arbitration is dismissed for failing to pay filing fees, and (5) any conclusion from a court or arbitrator that the arbitration agreement does not comply with CFPB regulations. These data collection rules will help the CFPB further refine its analysis of how arbitration agreements are used, and whether they benefit consumers.
The CFPB’s rules have yet to go into effect, however, and there is good reason to think that they may never go into effect.
One obstacle is the ongoing litigation, covered by this blog, challenging the CFPB’s very existence. In October 2016, the United States Court of Appeals for the DC Circuit ruled that the CFPB’s single agency head structure is unconstitutional. The court concluded that to make the CFPB constitutional, the President must be able to terminate the CFPB’s director at will.
However, on February 16, 2017, the full DC Circuit decided to hear the case, and temporarily suspended the three-judge panel’s decision. The full DC Circuit will hear arguments in May 2017. The DC Circuit may decide the CFPB’s current structure is constitutional, keeping Richard Cordray as the director and protecting him from termination by the President. Or the DC Circuit could decide the CFPB’s structure is unconstitutional and allow the President to terminate Richard Cordray. If that happens, conventional wisdom is that President Trump will terminate Mr. Cordray and appoint someone who will generally be less zealous in pursuing new regulations on financial institutions.
Aside from the court case, the CFPB’s new rules face practical challenges. Regardless of the outcome of the DC Circuit case, Richard Cordray’s term as director ends in July 2018. President Trump has already signaled that former Texas Congressman Randy Neugebauer is a leading candidate to be the CFPB’s next director. As a congressman, Mr. Neugebauer sponsored legislation to make the CFPB less independent, and has generally been critical of the CFPB’s mission. It is probably safe to say that Mr. Neugebauer will not want the new arbitration rules to go into effect.
If the CFPB decides to make the arbitration rules final now it faces another obstacle: Congress. Under the Congressional Review Act (“CRA”) of 1996, Congress can override any new regulation with a simple majority vote in each house and the President’s signature. Congress has to act within 60 days of the rule becoming final. If Congress quashes a rule under the CRA then no substantially similar regulation can be imposed without specific congressional authorization. As of April 1, 2017, Congress has used the CRA to repeal 13 regulations issued in the waning days of President Obama’s term. Congress would likely do the same for any CFPB arbitration rules.
For now, financial institutions can continue to include arbitration clauses in their contracts with consumers, including deposit account agreements. Until the CFPB’s rules take effect, if ever, the arbitration clauses can also include a class action waiver. Financial institutions should talk to their attorneys about the pros and cons of including these provisions in their contracts with consumers.
The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed.