By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She now spends much of her time in Asia and is currently working on a book about textile artisans.
As expected, the House of Representatives voted yesterday to overturn the Consumer Financial Protection Bureau’s (CFPB) ban on mandatory arbitration, the Arbitration Agreements Rule.
The House relied on the Congressional Review Act (CRA), which provides expedited procedures for passing legislation rescinding any regulation that was finalized in the preceding 60 session days, by simple majority votes in each chamber. There is no need for prior committee consideration by either house, and the measure is exempt from a possible Senate filibuster. Once the CRA resolution of disapproval is signed by the President, the rule is rescinded.
Short-Lived Final Arbitration Agreements Rule
As the agency explained in its press release announcing the rule on July 10:
Many consumer financial products like credit cards and bank accounts have arbitration clauses in their contracts that prevent consumers from joining together to sue their bank or financial company for wrongdoing. By forcing consumers to give up or go it alone – usually over small amounts – companies can sidestep the court system, avoid big refunds, and continue harmful practices. The CFPB’s new rule will deter wrongdoing by restoring consumers’ right to join together to pursue justice and relief through group lawsuits.
I refer readers to Bill Black’s excellent post, Bill Black: The CFPB Arbitration Rule is Pro (Honest) Businesses, discussing the criminogenic environment that led the agency to promulgate this rule in the first instance and outlining why it was desperately needed.
My August post, Business Groups Aim to Strong-Arm CFPB on Arbitration, provides further detail on this issue, particularly on the importance of the admittedly imperfect mechanism of class action lawsuits to deter corporate misbehavior in the absence of effective action by regulators and prosecutors.
The Senate is now expected to vote on overturning the arbitration rule in September– according to this WSJ article, House Votes to Repeal CFPB’s Arbitration Rule. Given the financial and corporate lobbying firepower that’s been deployed on this issue, that body will almost certainly vote to overturn the rule, over the strenuous objections of consumer advocates, as reported by US News and World Report in Republicans Move to Repeal Financial Rule Opposed by Banks:
“Unfair clauses hidden in the fine print of consumer contracts may be the single most pernicious tactic that the financial industry uses to escape accountability for cheating, conning, fleecing, defrauding and plundering consumers,” said Lisa Gilbert, a vice president at Public Citizen.
The White House has already made its position on the matter clear, issuing a statement saying it “strongly supports” the House bill that would nullify the rule:
If allowed to take effect, the CFPB’s harmful rule would benefit trial lawyers by increasing frivolous class-action lawsuits; harm consumers by denying them the full benefits and efficiencies of arbitration; and hurt financial institutions by increasing litigation expenses and compliance costs (particularly for community and mid-sized institutions). In many cases, these increased costs would be borne, not by the financial institutions, but by their consumers.
That means that once the full CRA process is complete– the new rule will be dead.
And, to make matters even worse for consumers, as regular readers who have been following my earlier CRA coverage know and I wrote in Trump and Congress Use Congressional Review Act to Roll Back 14 ‘Midnight’ Rules; More to Follow?:
Crucially and importantly, once the regulation has been successfully voided, the regulatory agency is barred from reviving the rule in “substantially the same form”– forever–in the absence of new legislative authority.
To repeat: This means the CFPB will not be able to reconsider this issue anytime soon, and indeed, further legislation would be necessary to authorize any future rulemaking.
Long Gestation: Why Did Cordray Wait So Long to Issue the Rule?
This leads me to a fairly obvious question: Why did CFPB director Richard Cordray wait so long for the agency to issue the rule banning mandatory arbitration? By deferring this decision until well into the Trump administration, the agency was setting itself up for this entirely predictable and inevitable CRA challenge.
Now, permit me a short aside. Although Cordray has yet to announce any formal intentions in this regard, he is widely expected soon to leave the CFPB to return to his home state of Ohio to run for governor– according to this Housing Wire piece, CFPB Director Cordray will run for Ohio governor, says state Supreme Court justice.
Issuing the rule earlier this month is one way of further shoring up his consumer protection bona fides– even though he certainly understood full well that Congressional Republicans and Trump would almost inevitably use the CRA to scupper one of his agency’s signature achievements. But the pending gubernatorial run merely explains why the rule was ultimately promulgated– and doesn’t address the reasons for the delay.
On that issue: I have never really understood why Cordray didn’t push for the agency to issue the rule far earlier than it did. After all, way back in December 2013 the CFPB released a preliminary but comprehensive study on the use of mandatory arbitration clauses. Reigning in mandatory arbitration– in the wake of Supreme Court decisions that allowed the practice to continue and spread– has long been a major consumer protection priority.
So, I repeat, why did the process take so long?
My guess is that Cordray and the agency were probably concerned about a court challenge and a possible overturn of the rule– not an idle concern, incidentally, and an issue that I discussed in my post cited above, Business Groups Aim to Strong-Arm CFPB on Arbitration). Business organizations such as the US Chamber of Commerce have effectively thwarted rule-making by the Securities and Exchange Commission and the Environmental Protection Agency on certain issues, to name just a couple of examples, by aggressively filing lawsuits.
But hiding under the bed and failing to issue a mandatory arbitration rule wasn’t going to make that lawsuit goblin go away. So I fail to see what purpose was served by the delay.
And unfortunately, in attempting to sidestep one goblin, the agency left itself open to attack by the CRA goblin, when, after the election, the Republicans retained control of both houses of Congress and Trump was installed in the White House.
What Next?: The Bottom Line
As I discussed in my earlier post, Mandatory Arbitration Clauses: What’s Next?, this is an area in which action by consumer-friendly state regulators– such as California, which has mulled its own anti-arbitration regime– won’t be able get around the Federal Arbitration Act (FAA) , which preempts any state measures and makes arbitration agreements “valid, irrevocable, and enforceable.” The Supreme Court has ruled against states creating categorical exemptions to the FAA absent Congressional authorization.
That means once the CRA process is completed, mandatory arbitration will be here to stay– for the indefinite future. Only new authorizing legislation– followed by subsequent rule-making by the CFPB or another federal agency– or the equivalently remote alternative of a major change in Supreme Court thinking on this issue, can reverse this situation. And– at the risk of stating the obvious– neither of these possibilities looks likely to occur anytime soon.