CFPB's Arbitration Rule Repealed
On October 24, 2017, the Senate passed the House resolution to disapprove of the Consumer Financial Protection Bureau's (CFPB's) Final Rule (Final Rule) that would have prohibited the use of pre-dispute arbitration agreements to bar class actions with respect to contracts for covered consumer financial products and services.1 The joint resolution was adopted under Congress's Congressional Review Act (CRA) authority and approved by President Trump on November 1, 2017, despite CFPB Director Richard Cordray's personal appeal to the contrary. The resolution will preclude the CFPB from promulgating a new rule that is substantially the same as the Final Rule without Congress's specific authorization.
The day before the Senate passed the House's CRA resolution, the US Treasury Department (Treasury) released a report criticizing the CFPB's analysis of both the costs and the purported benefits of the Final Rule. Specifically, Treasury found that the Final Rule would generate substantial legal costs for both businesses and consumers, that class actions generally do not provide consumer relief, and that the CFPB had not demonstrated the likelihood of any compliance benefit from implementation of the Final Rule. This line of criticism echoed that of Acting Comptroller of the Currency Keith Noreika, who has asserted that the Final Rule would increase costs on banking institutions while providing no demonstrable benefits for consumers and who claimed the demise of the Final Rule as a victory for both consumers and banks.
Although the Final Rule is dead, providers of consumer financial products and services should bear in mind that the CFPB, the prudential federal banking regulators, the Federal Trade Commission, and the states' attorneys general still may take action against the use of particular arbitration agreements that draw their attention—whether due to consumer complaints, court challenges, or otherwise. Therefore, companies should continue to review their arbitration agreements for clarity and fairness in anticipation of having to defend them against allegations that they constitute unfair, deceptive, or abusive acts or practices, or similar challenges.
It is also important to recall that other financial regulatory agencies still have authority to maintain or even increase restrictions on arbitration agreements. For example, FINRA has long required disclosure for, and restricted the use of, such agreements in certain contexts. The Dodd-Frank Wall Street Reform and Consumer Protection Act also provided the Securities and Exchange Commission (SEC) parallel authority, which it has not yet used, to prohibit mandatory pre-dispute arbitration agreements in customer contracts. Moreover, a change in the balance of power in Congress could result in further attempts to restrict arbitration agreements.
While the immediate threat of new restrictions on arbitration agreements has passed, as noted, institutions should confirm that their existing or future arbitration agreements are clearly worded and that they are not open to attack under other consumer protection laws. If you have any questions about any of the topics discussed in this Advisory, please contact your firm attorney or any of the authors of this Advisory.
© 2017 Arnold & Porter Kaye Scholer LLP. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.
The Final Rule would have adopted the rule (Proposed Rule) proposed in the CFPB's May 2016 Notice of Proposed Rulemaking, which was summarized in our prior client advisory "5 Things Every Company Needs to Know About the CFPB's Proposed Rule on Arbitration."Our prior client advisory "CFPB's Final Arbitration Rule Published" described the Final Rule's notable revisions to the Proposed Rule.