Richard W. Shepherd
Loyola University Chicago School of Law, JD 2019
Since its inception in 2010, The Consumer Financial Protection Bureau (CFPB) has garnered its fair share of criticism and controversy. The regulator was created by the Dodd-Frank legislation to curb the practices and risks, which brought about the financial crisis of 2007-2008. The CFPB is often criticized by the banks and firms it regulates, but now a fellow federal regulator is casting doubt on the CFPB’s new rule concerning mandatory arbitration clauses found in contracts for commonly used banking products, such as checking accounts and credit cards. The rule is also opposed by Congress, which is working on measures to repeal the rule, and several financial industry and lobbying groups who are suing the CFPB.
The Consumer Financial Protection Bureau
The Consumer Financial Protection Bureau (CFPB) was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010. The CFPB describes itself as “a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives.”
Senator Elizabeth Warren (D-MA) is often credited for the creation of the CFPB. Senator Warren said the CFPB has been dedicated to taking “tricks and traps out of financial products, like credit cards, and hold cheaters accountable.” The agency certainly has been productive in its short existence. The CFPB has handled more than 1 million complaints in the past 6 years.
Senator Warren also pointed to a recent rule the agency crafted as an example of the important consumer protections the CFPB is writing. The rule will allow Americans who are “cheated” by their banks on fees to join together and “get some accountability from the bank.” The rule, issued on July 10, 2017, is a protection for consumers against mandatory arbitration which will make it easier for consumers to file or join an existing lawsuit if they are harmed by a financial service provider.
The CFPB argues the new arbitration rule is a necessary protection for consumers. The agency claims the mandatory arbitration clauses in contracts signed by consumers when they open financial products, such as checking accounts and credit cards, deny consumers their day in court, help banks avoid paying out big refunds, and allow harmful practices to persist. The rule achieves these goals by forcing financial companies to write arbitration clauses in ways that wouldn’t prevent consumers from joining class-action lawsuits. The rule also requires firms to provide the CFPB with information about claims, answers, counterclaims, and awards issued in arbitration. The CFPB will also collect correspondence companies receive from arbitration administrators regarding a company’s non-payment of arbitration fees and its failure to follow the arbitrator’s fairness standards. The review will allow the CFPB to judge whether the process is fair. The CFPB estimated that the arbitration rule will result in 6,042 additional class actions over the next five years that will cost financial companies between $2.6 billion and $5.3 billion to defend.
Shortly after the CFPB introduced the arbitration rule, GOP lawmakers introduced a bill to repeal the agency’s ruling under the Congressional Review Act (CRA). Republicans in both the House and Senate introduced companion measures to repeal the rule. The CRA allows lawmakers to repeal regulations released by executive agencies within 60 days of their finalization.
Senate Banking Committee Chairman Mike Crapo (R-ID) said it was essential for Congress to repeal the rule, which he called another example of the CFPB’s lack of accountability. The House voted to overturn the arbitration rule 231-190 in July, but the Senate has yet to act and must do so by early November to repeal the rule.
Disagreement Among Federal Regulators
As Congress moves to repeal the CFPB’s arbitration rule, the financial services industry is mounting its own effort to take down the new rule. A coalition of financial companies and lobbying groups sued the CFPB to overturn the rule. The litigation was filed on September 29, 2017 in the U.S. District Court Northern District of Texas. The plaintiffs include the U.S. Chamber of Commerce, the American Bankers Association, the Consumer Bankers Association, the Financial Services Roundtable, and the American Financial Services Association. The lawsuit claims the CFPB’s rulings are not valid because the structure of the agency is unconstitutional. The lawsuit also claims the CFPB relied on a flawed study, which ignored evidence that the regulation would be harmful to consumers.
Surprisingly, The Office of the Comptroller of the Currency (OCC), the federal regulator charged with chartering, regulating, and supervising national banks, issued a report rebuking the CFPB’s arbitration rule. The report undermines the integrity and completeness of the CFPB’s study of consumer arbitration, which claimed it did not find any evidence the rule would increase the cost of consumer credit. The OCC reviewed the same data and found “a strong possibility of a significant increase in the cost of credit cards as a result of eliminating mandatory arbitration clauses.” The OCC’s study also estimates an 88% chance that the total cost of credit will increase, and a 56% chance that costs will increase by 3% or more. The estimated average increase in the total cost of credit is expected to be 3.43%. In total, interest rates on credit cards could rise as much as 25%.
Acting Comptroller of the Currency Keith Noreika has opposed the rule since its issuance in July. The OCC initially requested the CFPB to postpone the arbitration rule, but the CFPB ignored the request. The OCC later decided to not intervene in the implementation of the rule, but urged Congress to consider repealing the rule.
Richard W. Shepherd is a former OCC employee.