The CFPB's Final Arbitration Rule: Second Verse, Same as the First
The Consumer Financial Protection Bureau's ["CFPB" or "Bureau"] July 10, 2017 final rule on the use of arbitration clauses in consumer financial products and services demonstrated the Bureau's determination to carry through with the sweeping prohibition on class action waiver clauses previewed in its 2016 proposal, notwithstanding a barrage of oppositional comments from financial institutions and small businesses, and despite a considerable chance the rule will be blocked by one of several mechanisms. The rule forces banks, credit card companies, credit unions, and others to include language notifying consumers they cannot be prevented from participating in class actions against a covered consumer financial product or service. The rule further requires providers that include individual arbitration provisions in their contracts to submit records on these agreements to the CFPB, which will post them on its website starting in July 2019.
Opponents of the rule cited studies showing the far lower damages recovery – and much longer wait – experienced by consumers in class action litigation, compared to arbitrated settlements. According to the Bureau's own study, consumers received an average of $29 each from class action settlements but $4,615 each in arbitration awards. Studies submitted by commenters presented an even larger contrast, with the difference accounted for by contingent fees accruing to class action trial attorneys. Analysis of this type has led the Supreme Court in recent years to hold repeatedly that class action waiver provisions are fully enforceable, see, e.g., AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011). In the Bureau's view, however, these facts are outweighed by its belief that access to group litigation enables consumers with small claims to bring challenges more easily and cheaply, even if their ultimate recovery is far less; perhaps even more importantly, fear of the cost of defending against these suits, the Bureau reasons, acts as a necessary deterrent to coerce desired behavior from financial services providers.
The Bureau rejected numerous objections to its approach. For example, in response to concerns that this broad-based approach will result in "over deterrence," that is, discouraging conduct that is not necessarily unlawful but is potentially susceptible to challenge, the Bureau relied heavily on its normative view that its measures are justified, because its overriding mission to protect consumers dwarfs other considerations. Although lacking a serious cost/benefit analysis, the Bureau responded that it "believes that in general the level of compliance in consumer financial products is below the optimal level…." Therefore, "even if at the margins, the effect of the class [action] rule would be to deter conduct that may be legal from occurring, the Bureau believes that, on balance, that would be a reasonable cost to achieve the benefits of the rule for the public and consumers." [Final rule at 278-79 and n.672.]
Similarly, the Bureau brushed aside requests for a less draconian approach, such as delineation of what practices are improper: "In response to the commenter that suggested that the Bureau should determine which conduct is unfair or deceptive because that would be more efficient than class actions, the Bureau's resources are limited, for all the reasons discussed above in Part Vi.B.5. For this reason, even if such a practice were more efficient than unfettered class actions, the Bureau has many competing priorities and likely would not be able to identify and communicate every type of unfair or deceptive practice for the many thousands of products or services within its jurisdiction." [Id. at 280-81.] By setting up the straw man that it would not be able to specify "every" type of unfair or deceptive practice, the Bureau excused itself from a regulatory duty to provide notice with any specificity of what conduct does constitute unfair and deceptive practices, rationalizing the need for a blanket ban instead.
The final rule is also notable for its lavish reliance on law firm client alerts advising companies to exercise caution, conduct compliance reviews, monitor developments, and prepare for an onslaught of class action cases in anticipation of the CFPB's likely prohibition of arbitration clauses. In the Bureau's eyes, these advisories in marketing materials make the case that fear of class action is an effective deterrent against bad practices. [e.g., id. at 244-45, nn. 624-31, 278, nn. 670-71.] Law firms should be on notice that the CFPB is closely reading their alerts and fully prepared to cite them as justifications for action in its rulemaking.
The rule will go into effect 60 days following publication in the Federal Register, and will apply to all contracts entered into more than 180 days after that. However, efforts are already in motion in Congress to vitiate the rule under the provisions of the Congressional Review Act, which has been used 14 times since the Trump Administration took office. A second avenue for blocking the rule may also be underway: the Financial Stability Oversight Council could overrule the regulation, but the procedure is complicated, with multiple actions that would be required by federal bank regulators and the Treasury Department in a relatively short period of time. If neither of these events occurs, it is a virtual certainty the rule will be challenged in federal court, with Supreme Court precedent favoring the permissible use of mandatory arbitration clauses in other contexts providing a significant leg up for opponents of the rule.
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Clark Hill's Consumer Financial Services Regulatory & Compliance Practice Group is a national leader in the field of consumer financial services law, providing strategic legal counsel to clients in all areas of consumer finance. We provide counsel, consultation and litigation services to financial institutions, law firms and debt buyers throughout the country. Our group can help you navigate this rapidly evolving regulatory environment. Our exceptional team of lawyers and government and regulatory advisors has extensive experience in – and an in-depth understanding of – the laws and regulations governing consumer financial products and services. We can assist you in developing and implementing compliance programs, as well as defending consumer litigation and regulatory enforcement actions.
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