How Does Congress’s Action Impact the CFPB’s Ability to Prohibit Arbitration Clauses?

In a nail-biter of a session, the Senate voted late in the evening on Oct. 24, to invalidate the Consumer Financial Protection Bureau’s recently finalized arbitration rule. The vote on the joint resolution — which had passed the House earlier this year — was 51 to 50 with Vice President Mike Pence assuming the gavel and breaking the tie at 10:10 p.m. EDT. All but two Republicans voted in favor of the resolution; Lindsey Graham of South Carolina and John Kennedy of Louisiana joined the 48 Democrat senators in voting to keep the arbitration rule intact. The joint resolution then went to the White House, where President Donald Trump signed it, officially marking the arbitration rule as dead.

Congress’s ability to invalidate the rule was made possible by the Congressional Review Act (CRA), signed into law by President Bill Clinton in 1996. The law created an expedited legislative process by which Congress could review — and overrule — new federal regulations by passing a joint resolution by a simple majority that is subsequently signed into law by the president.

Once Congress exercises its CRA authority to overturn a rule, the statute prohibits the agency that promulgated the rule from re-promulgating that rule — or promulgating a new rule — in “substantially the same form” as the one that was the subject of the joint resolution “unless the reissued or new rule is specifically authorized by a law enacted after the date of the joint resolution disapproving the original rule.” Herein lies the true import and effect of the statute as it relates to the CFPB’s ability to tamper with arbitration going forward.

How does Congressional action impact the CFPB and its ability to prohibit or restrict arbitration clauses? Let’s explore. On its face, the arbitration rule banned the use of mandatory pre-dispute arbitration clauses in contracts for consumer financial products and services. It permitted the continued use of mandatory pre-dispute arbitration clauses, but such clauses would only apply to individual arbitration.

Should a financial services provider have wanted to continue to use mandatory pre-dispute arbitration clauses, the arbitration rule imposed significant — and dangerous — reporting requirements on providers that continued to use such clauses. Because of those reporting requirements, a choice to continue individual arbitrations would have been, in the eyes of some (including me), contractual suicide. Virtually all the information the rule required providers to submit to the CFPB — their name, the complaint, any counterclaims, the ruling, relief, etc. — would have been posted publicly on the CFPB’s website, making it the first stop on the plaintiffs’ bars’ journey to filing class-action lawsuits.

In effect, the rule created so much legal exposure for financial services providers to use arbitration clauses in any consumer contract or agreement that it effectively banned arbitration. The way the CFPB accomplished that was clever, no doubt, but that cleverness may now come back and bite them by foreclosing its ability to do any rulemaking affecting arbitration. To wit, the CFPB is now foreclosed from promulgating any rule that:

• bans, or has the effect of banning, class-action waivers in
  arbitration; or
• bans, or has the effect of banning, arbitration clauses.

This is great news for the industry, and great news for consumers who are interested in receiving monetary relief through arbitration for harms suffered at the hands of financial institutions.

I understand why the CFPB chose to favor class actions over arbitration. Its study posited that too few consumers choose to take their complaints to arbitration. But there are many reasons why one might not choose to pursue a claim — e.g., not the least of which is that the consumer made a conscious choice in that regard. It could be that the consumer was not disturbed enough to care, or the injury had no quantifiable impact on the consumer.

Most consumers would not actively seek to be a named plaintiff in a class action either. In fact, the “harm” in many class actions is so trivial that few consumers might even care. Whatever its reasoning, the fact that arbitration gives consumers a fast, efficient, and acceptable way to address their claims is something the CFPB cannot seem to accept.

Finally, despite this win, the industry shouldn’t get too comfortable or think that attacks on arbitration are over. The CFPB has many smart and dedicated people on staff, and they are probably already strategizing the future. The Congressional action to kill the arbitration did not repeal the arbitration authority it granted to the CFPB in Dodd-Frank; that authority still stands, and is meaningful if the CFPB can come up with some other rulemaking that isn’t preempted by the death of its current rule.

New leadership may preclude future action, and the CFPB may have “screwed the pooch” by being so aggressive in its now-disfavored rule such that its options are limited. But, if there are options available to create roadblocks to arbitration going forward, I have no doubt the CFPB will find them.

Michael Benoit is a partner in the Washington, D.C., office of Hudson Cook LLP. He is a frequent speaker and writer on a variety of consumer credit topics. Michael can be reached at 202-327-9705 or mbenoit@hudco.com. Nothing in this article is legal advice and should not be taken as such. Please address all legal questions to your counsel.