Loyola University Chicago School of Law, J.D. 2019
In July of 2017, the Consumer Financial Protection Bureau (“CFPB”) Director, Richard Cordray, implemented a rule regulating the ability of banks to prohibit class-action lawsuits from being placed within the fine print of their consumer contracts. By the end of July, the House of Representatives voted to repeal the rule under the Congressional Review Act, which allows lawmakers to overturn any recently issued regulation by an executive agency. The Senate subsequently voted to repeal the rule after a 50-51 vote, where Mike Pence cast his vote to break the 50-50 tie. On November 1st, 2017, President Trump signed the bill repealing the regulation.
Origins of the regulation
President Barack Obama oversaw the creation of the CFPB after the 2008 financial crisis. The agency’s mission is to regulate the consumer financial markets for the protection of the economy as a whole. Specifically, the regulator focuses upon prevention of unfair, deceptive, and abusive practices of businesses which aim to prey upon American consumers.
The Dodd-Frank Wall Street Reform and Consumer Protection Act charged the CFPB with investigating the use of mandatory arbitration clauses in consumer financial markets. Upon concluding its investigation, the CFPB drew three conclusions regarding the use of mandatory arbitration clauses.
The primary role of mandatory arbitration clauses is to deny consumers their day in court. Providing greater detail, the CFPB investigation concluded that, without class-action lawsuits, few consumers ever consider bringing individual legal action against financial service providers. Furthermore, only two percent of consumers with credit cards stated that they would consult an attorney regarding low damages claims. Thus, the practical effect of mandatory arbitration clauses is to prevent exposure to the majority of a company’s potential claims.
Another conclusion of the report is that mandatory arbitration clauses aid financial institutions in avoiding paying out large refunds. Where individual suits are filed, individuals bringing a suit receive lower amounts of compensation for their injury when compared to a per capita award for class-action suits.
The CFBP also found that utilizing mandatory arbitration clauses allows financial institutions to continue predatory, economic practices. While certain individual claims may return full damages for an individual, corporations are less likely to change their policies if there is no group lawsuit. The Bureau found that in every group settlement investigated, companies agreed to institute new compliance programs.
Details of the CFPB rule
Under the guidelines of the CFPB rule, all consumers’ rights to file and join group lawsuits are restored. However, businesses are still free to include arbitration clauses within their contract. Though as a rule, no longer may companies use mandatory arbitration clauses to bar an individual’s right to join a class-action suit. For policy reasons, the CFPB finds that companies are less likely to engage in unlawful practices if they can be held accountable through class-action lawsuits.
Additionally, the CFPB rule requires that corporations submit to the agency specific records regarding all claims and awards given through internal arbitration agreements. The submission of this information will allow the CFPB to ensure the fairness of arbitrator’s decisions and promote transparency for arbitration agreements.
Response to the CFPB arbitration rule
Congress’s response to the arbitration rule was swift. Before the end of July, the House of Representatives brought a vote to overturn the rule under the Congressional Review Act. The Congressional Review Act grants Congress the broad power to review federal regulations and overrule a regulation once it is finalized by an executive agency. An important component of the Congressional Review Act is that it bars an agency from reissuing the rule in the same form or from reissuing a rule that is substantially the same. In this sense, if Congress successfully repeals a regulatory rule, the rule is dead.
The House of Representatives successfully voted to overturn the rule under the Congressional Review Act, and in October, the CFPB’s arbitration rule appeared before the Senate. Arriving at a 50-50 vote, Vice President Mike Pence broke the tie in favor of repealing the regulation. President Donald Trump then signed the bill repealing the regulation on the first of November, 2017.
The policy response to the CFPB rule fell largely among the political spectrum with only two conservative senators breaking rank from the majority. The proponents of the rule largely reflect the same reasoning provided by the CFPB for originally implementing the rule; however, critics of the rule cite a number of reasons for wanting to overturn the regulation.
The primary contention for overturning the rule is that arbitration is almost always faster and less expensive for consumers when compared to a lawsuit. Critics believe that the rule would force small disagreements into class-action lawsuits resulting in excessive expenses for all parties. The same critics states that these expenses ultimately promote frivolous lawsuits and antibusiness regulation.
Future outlook regarding the CFPB
On its face, overturning the CFPB rule has no immediate effect on the enforcement of regulatory law. The CFPB signed the rule to take effect during 2018, and its repeal changes nothing regarding the agency’s current enforcement of law and regulation. However, Congress’s actions overturning the rule may signal a turning point regarding the future of the CFPB and financial regulation.
Under the Congressional Review Act, the CFBP is barred from implementing similar regulation under a different name. Additionally, the CFBP director was appointed under President Obama, and while President Trump has shown no indication of removing Director Cordray, his term ends in July of 2018. Under a Trump-appointed director, the CFPB may take a different stance on financial regulation, and while the current executive administration has struggled so far to repeal financial regulations implemented under President Obama, overturning this regulation may be a sign of upcoming trends for the future of financial regulation.