This post describes the recent move in Congress to rescind the CFPB rule, and what this means for the CFPB and the financial services industry going forward.
On Tuesday, the Senate voted 51-50 to overturn the Consumer Financial Protection Bureau’s (“CFPB”) July 2017 rule banning firms from including arbitration clauses blocking class-action lawsuits in consumer financial contracts (the “Rule”). Vice President Mike Pence cast the tiebreaking vote in favor of repeal. The Senate’s action follows a 231-190 vote in the House in July 2017 to overturn the Rule. Under the Congressional Review Act (“CRA”), which allows Congress to rescind a regulatory action, passage of the resolution by simple majority in both chambers was all that was needed to send the resolution to President Trump, whose expected signature will invalidate the Rule and prohibit the CFPB from revisiting it for an extended period of time.
As discussed in a previous post, the now-endangered Rule, which was set to become effective next year, applies to essentially any person or entity providing or supporting consumer financial services (“Providers”), and consists of two noteworthy restrictions that would create substantial procedural and compliance challenges for Providers. First, the Rule would require Providers to modify arbitration agreements to ban pre-dispute limitations on class actions, and to update old agreements as new products and services are obtained. As part of this process, Providers would be required to supply consumers with class-action bans in older agreements to notify them that such provisions are now null and void. Second, the Rule would require Providers to report arbitrations covered by the Rule to the CFPB, which would make the data publicly available to facilitate the filing of follow-up claims by other potential plaintiffs. The mere cost of technically complying with the Rule would be expensive for Providers, which, together with Providers’ increased exposure to a proliferation of class-action litigation arising out of the banned provision, would likely require Providers to increase the prices of their products and services to cover the cost of doing business. The argument on the CFPB’s side is that empowering class-action lawyers would help consumers overall because such litigation affords consumers injunctive relief, thereby stopping harmful practices in the financial services markets that the plaintiffs’ bar may detect more quickly than the CFPB could.
The Senate’s move to invalidate the Rule came just one day after the Department of the Treasury released a highly-critical report on the Rule, concluding, among other things, that it “imposes extraordinary [litigation] costs” and that the CFPB failed to demonstrate that the Rule will either benefit consumers through class actions or “achieve a necessary increase [in] compliance with the federal financial laws, despite the [R]ule’s high costs.” The Treasury report itself follows on the heels of a lawsuit filed by industry groups against the CFPB claiming that the Rule should be invalidated, first, because the CFPB is allegedly unconstitutionally structured, and second, because the Rule allegedly violates both the Administrative Procedure Act and the Dodd-Frank Act. Many of these arguments mirror allegations made in other lawsuits filed against the CFPB, one of which is now pending before the D.C. Circuit Court of Appeals.
Indeed, the Rule and its earlier iterations have been met with strong opposition dating back to years before the Rule’s official promulgation. Leaving politics aside, the CFPB was authorized under the Dodd-Frank Act to look at the issue of consumer harm from arbitration practices, including, for instance, “no-class provisions” that effectively bind consumers to use arbitration and agree not to bring class actions. However, the CFPB drafted the Rule (and data studies in support of the Rule) as a fait accompli that viewed class-action cases as a panacea for all consumer woes. That is not reality. Anyone who receives one of those checks for $1.97 announcing his or her cut of a class-action victory knows how futile a class-action lawsuit can be for remedying past grievances. In fact, class-action matters can be nominal in terms of providing people with monetary relief, particularly when compared to CFPB refund checks from restitution in CFPB enforcement matters. But the Rule did not take the CFPB’s vast enforcement power, or this reality for consumers, into account. This could be a huge lesson in lost opportunity. For example, the CFPB could have sought to couple arbitration reform with class-action reform to improve the system overall for American consumers. But the CFPB did not pursue class-action reform.
On the politics side, the Rule was strategic in the exertion of countless man-hours by sincere and well-meaning CFPB staff to codify the policy position of consumer advocates and class-action lawyers, but it was not strategic in terms of rallying support among centrists. In fact, the Treasury report specifically criticizes the CFPB for failing “to consider less onerous alternatives to its ban on mandatory arbitration clauses across market sectors.” The CFPB could have approached its rulemaking differently to better account for these concerns. For example, the CFPB could have designed the study on which the Rule was based to look at the ancillary effects of class actions on consumers to quantify the benefits of class actions more rigorously. Or to look at the distinction in the number of frivolous versus meritorious class-action claims when assessing the efficacy of litigation as a tool for consumers to “avail their rights.” The study could also have sought data from companies on the costs and impact of class actions from the standpoint of determining whether the Rule would make financial products more expensive. Such an approach could have protected consumers’ interests in a more holistic manner.
While this is all Monday morning quarterbacking at this point, the CFPB’s “my-way-or-the-highway” approach carried with it the risk of heightened skepticism of the consumer-protection effects of the Rule, even among lawmakers who were initially lukewarm about killing the Rule. For example, Senators Susan Collins (R-ME), Lisa Murkowski (R-AK), and John McCain (R-AZ), who were seen as being on the fence, ultimately voted for repeal. Strategic thinking means long-term thinking. But the CFPB’s purist lens in viewing the issue (let’s have more class action lawsuits!), while theoretically rooted in a noble intent to achieve greater consumer protection, dilutes the CFPB’s credibility as a bank regulator and—in turn—erodes its efficacy in disciplining the markets as a whole, which is arguably harmful to the very consumers the CFPB is tasked with protecting.
How Congress’ decision to repeal the Rule will impact CFPB Director Richard Cordray’s fate, the CFPB’s new rule restricting high-interest payday loans (which some observers have predicted will also be invalidated under the CRA), or the future of the CFPB itself, is anyone’s guess. However, if and when Director Cordray does leave—whether this week or in July 2018 (or sometime in between)—the demise of this Rule will likely not become a lasting blemish on his legacy. Robust opposition to the Rule was anticipated long before the Rule was promulgated. And less Congressional opposition exists with respect to the other CFPB rules than to the anti-arbitration Rule now before President Trump, in part due to their perceived benefits to the financial services industry. Consequently, some horse-trading may need to occur before Republicans can secure the necessary number of votes to pass yet another joint resolution repealing a CFPB rule. What is certain is that the CFPB will remain in the news, and that a much clearer picture of the potential success of its initiatives will emerge in the coming months.