CFPB, Testing Trump and Republicans, Moves to Restrict Forced Arbitration

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CFPB Director Richard Cordray speaking at the U.S. Chamber of Commerce's 11th Annual Capital Markets Summit: Financing American Business, in Washington, D.C. March 30, 2017.

The Consumer Financial Protection Bureau on Monday finalized a sweeping new rule banning arbitration agreements that prevent class actions against banks and other financial institutions, setting the stage for parallel legal and political fights over a regulation that Republican lawmakers will seek to overturn before it sees the light of day.

Arbitration clauses in contracts for products like bank accounts and credit cards make it nearly impossible for people to take companies to court when things go wrong, said CFPB Director Richard Cordray, in a prepared statement. These clauses allow companies to avoid accountability by blocking group lawsuits and forcing people to go it alone or give up. Our new rule will stop companies from sidestepping the courts and ensure that people who are harmed together can take action together.

The move comes more than a year after the CFPB proposed the rule for arbitration agreements, calling such terms contract gotchas that allow the financial industry to sidestep the legal system. In taking the final step to push forward with the rule, the CFPB crossed off a bucket-list item for Cordray as he enters the final year of his five-year term and mulls a run for governor in his home state of Ohio.

The rule will take effect 60 days after it is published in the Federal Register and apply to contracts entered into more than 180 days after that date.

But the rule's fate is far from certain. Republican lawmakers, buoyed by their majority in both chambers of Congress and President Donald Trump's surprise election, have seized on their power to rip up regulations that were vulnerable to the Congressional Review Act a legislative tool that has been employed to override more than a dozen Obama-era regulations. Their deregulatory frenzy is unprecedented: Before this year, that law had been used only once in its 21-year history to repeal a newly-implemented rule.

For the CFPB, the calculation for finalizing the arbitration rule was complicated. If the regulation falls victim to the Congressional Review Act, the CFPB would be barred from moving forward in the future with a substantially similar rule unless it receives support from a new statute.

Leading consumer advocacy groups pressed the CFPB in recent months to finalize the arbitration rule. At a May 18 meeting with Cordray, CFPB staff and several other consumer advocacy groups, Americans for Financial Reform urged the bureau to finalize the arbitration rule as soon as possible, according to a meeting summary posted online last month.

During a conference call Monday, Cordray acknowledged the threat posed by the Congressional Review Act. Earlier this year, the CFPB finalized a package of regulations for the prepaid card industry that survived a Congressional Review Act challenge.

I am, of course, aware of those parties who have indicated they will seek to have the Congress nullify this new rule, Cordray said Monday. That is a process that I expect will be considered and determined on the merits. My obligation as the director of the consumer bureau is to act for the protection of consumers and in the public interest. In deciding to issue this rule, that is what I believe I have done.

Justice Department Won't Rush to CFPB's Aid

The Trump administration U.S. Justice Department's aversion to class actions isn't hypothetical, and the agency would not likely support the CFPB in any court fight. The department has switched litigation positions, or moved to abandon, provisions in several key disputes that restricted the use of arbitration agreements.

Rachel Brand, the third in command at the DOJ, formerly led the litigation arm of the U.S. Chamber, one of the most vocal opponents to the CFPB's proposal last year.

As we review the rule, we will consider every approach to address our concerns, and we encourage Congress to do the same including exploring the Congressional Review Act, the U.S. Chamber Institute for Legal Reform said Monday in a statement. Additionally, we call upon the administration and Congress to establish the necessary checks and balances on the CFPB before it takes more one-sided, overreaching actions.

Lisa Donner, executive director of Americans for Financial Reform, said in a statement in support of the CFPB's rule: Forced arbitration deprives victims of not only their day in court, but the right band together with others targets of corporate lawbreaking. It's a get-out-of-jail-free card for lawbreakers. The consumer agency's rule will stop Wall Street and predatory lenders from ripping people off with impunity, and make markets fairer and safer for ordinary Americans.

The rule still allows companies to force individual lawsuits into arbitration. But it requires them companies to turn over information about their use of arbitration, including the amounts of awards issued in those proceedings.

In the buildup to its proposal, the CFPB completed a congressionally mandated study on the use of mandatory arbitration clauses. The study found that arbitration agreements, namely the class-action waivers tucked in them, restrict consumers' ability to favorably resolve disputes with financial institutions. According to the study, few consumers seek relief through arbitration or an individual lawsuit in federal court, although millions are eligible each year for relief that would come from class action settlements.

The study, published in 2015, paid off, said Deepak Gupta, a former CFPB attorney who now works as a public interest litigator at Washington's Gupta Wessler. You have overwhelming evidence that what arbitration does is not put claims into a cheaper, better, faster system. It just kills them.

The financial industry has pushed back against the CFPB's rule, arguing that it would force companies to no longer subsidize arbitration programs that provide consumers with a cheaper, faster mechanize to resolve disputes. In the comment period, trade groups including the U.S. Chamber of Commerce, American Bankers Association and Consumer Bankers Association argued that the CFPB's proposed rule was not justified by the arbitration study's findings.

Similar arguments are expected to be raised in court challenges to the rule.

The CFPB's rulemaking is based on a highly controversial and flawed study that ignored the practical benefits of arbitration, as compared to the court system, for addressing the types of injuries that consumers most often suffer, said Lisa Rickard, president of the U.S. Chamber Institute for Legal Reform, and David Hirschmann, president and CEO of the U.S. Chamber Center for Capital Markets Competitiveness, in a prepared joint statement.

Rickard and Hirschmann continued: While arbitration is faster and cheaper for consumers, the bureau chose to release this rule, which will eliminate the option of arbitration for most consumers. Arbitration has been common practice for decades and provides consumers, employees, and other injured parties with accessible and fair procedures for obtaining redress for claims that cannot be vindicated in court.

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C. Ryan Barber, based in Washington, covers government affairs and regulatory compliance. Contact him at cbarber@alm.com. On Twitter: @cryanbarber

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