The Consumer Financial Protection Bureau's ("CFPB") arbitration rule, which governed consumer financial contracts and prohibited class action waivers, survived only about four months. Congress recently nullified the rule under the Congressional Review Act. Vice President Mike Pence broke a 50-50 tie in the U.S. Senate to disapprove the arbitration rule, and in early November, President Trump signed the resolution passed by Congress to eliminate the CFPB's arbitration rule. This outcome marks a major victory for financial institutions; on the other hand, consumer advocacy groups and proponents of the CFPB's rule claim that the elimination of the CFPB's rule is a significant setback for consumers.
The History
The shelf life of the CFPB's rule – lasting only about four months – stands in stark contrast to the efforts involved in implementing the rule in the first instance. In response to the Great Recession, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act"), which President Barack Obama signed into law in 2010. 12 U.S.C. § 5301, et seq. The Dodd-Frank Act included substantial changes to the financial industry and to the federal agencies that govern them. One of the major components of the Dodd-Frank Act was the establishment of the CFPB. 12 U.S.C. § 5491. The CFPB is charged with regulating consumer financial products and services, and covered entities under federal consumer financial laws. Id. § 5491(a). Its purpose is to implement and enforce "consumer financial law consistently for the purpose of ensuring that all consumers have access to markets for consumer financial products and services and that markets for consumer financial products and services are fair, transparent, and competitive." Id. § 5511(a).
Included among the financial regulations was a provision that charged the CFPB to conduct a study on the use of arbitration agreements with financial institutions. Specifically, the Dodd-Frank Act states, "The Bureau shall conduct a study of, and shall provide a report to Congress concerning, the use of agreements providing for arbitration of any future dispute between covered persons and consumers in connection with the offering or providing of consumer financial products or services." Id. § 5518(a).
The Study
The CFPB embarked on a three-year study of the impact of arbitration in agreements between consumer and financial institutions. In March 2015, the CFPB completed and released its study on the use of arbitration clauses in agreements with consumers relating to financial products and services (the "Study"). The Study indicated that a substantial number of agreements with consumers for financial products and services contain arbitration clauses. The CFPB found that there are tens of millions of consumers who are subject to arbitration clauses in agreements with financial institutions. Arbitration clauses are included in 53% of credit card agreements, 44% of insured deposits in the checking account market, 92% of prepaid cards (based on those sampled by the CFPB), 99% of storefront payday loans from California and Texas, and 99% of mobile wireless agreements. The CFPB also found that arbitration clauses were more prevalent in agreements with larger financial providers. Most of these arbitration clauses contain class action waivers, meaning that a consumer who is required to arbitrate any dispute may not participate in or otherwise initiate a class action in relation to any common issues. The CFPB found that 93.9% of credit card arbitration agreements, 88.5% of checking account arbitration agreements, 97.9% of prepaid card arbitration agreements, 88.7% of storefront payday loan arbitration agreements, 100% of private student loan arbitration agreements, and 85.7% of mobile wireless arbitration agreements of those sampled by the CFPB included class action waivers.
Based on the data from the Study, the CFPB concluded that the limited number of formal actions that consumers have filed in courts or in arbitration is not a reflection of whether consumers have claims, but suggests that the size of consumers' claims usually makes it impractical to pursue formal action individually. Even if consumers wanted to pursue an individual action, the CFPB believes that attorneys would be disinclined to take on such representation, given the limited amount in controversy and the general unavailability of the class action device. Therefore, the CFPB determined that a prohibition on class action waivers in arbitration agreements would benefit consumers, as they would have a greater incentive to pursue actions against financial providers, would be more likely to obtain favorable results, and would create a deterrent effect in the industry against unlawful conduct.
Class Action Waivers
In July 2017, based on the CFPB's concerns about class action waivers, the CFPB issued a rule that arbitration agreements were inapplicable to cases filed in court on behalf of a class unless and until class certification was denied or the class claims were dismissed. If a financial institution wanted to arbitrate claims, then it would have to wait until any class issues were addressed by a court.
One of the primary arguments by consumer advocates against the use of class action bans is that these groups claim that the class action waivers have the effect of cutting off customers from seeking redress from financial institutions. Consumer advocates have said that removing the class action bans eliminated the most effective defensive weapon against class actions. On the other hand, financial institutions have argued that arbitration allows for efficient and more cost-effective resolution of disputes, and any ban on class action waivers could result in the elimination of arbitration in these kinds of agreements. Financial institutions also have concerns about abusive class action litigation.
Next Steps
Despite the efforts to create the CFPB, and the CFPB's efforts to implement the arbitration rule, the arbitration rule has been nullified by Congress and President Trump under the Congressional Review Act. Consequently, regulators are now barred from creating any substantially similar regulation unless they are authorized by Congress to do so.
