RIP, CFPB Mandatory Arbitration Ban

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.

On Wednesday, Trump signed into law H.J.Res. 111, thereby nullifying the Consumer Financial Protection Bureau’s (CFPB) Arbitration Agreements Rule, prohibiting the use of a pre-dispute arbitration agreement to prevent a consumer from filing or participating in certain class action suits.

The CFPB’s mandatory arbitration ban was perhaps the most consumer-friendly action that agency had taken to date, and its overturn represents a major setback for the agency.

Many financial services companies require their customers to consent to use mandatory arbitration procedures to settle subsequent disputes, thereby  “voluntarily” giving up any right to file or participate in class actions. Courts right up to and including the Supreme Court have generally upheld such agreements.

Alas, as regular readers may recall, since procedures authorised by the Congressional Review Act (CRA) were used to overturn the rule, the CFPB is barred from reviving the rule in “substantially the same form”,unless and until Congress passes new authorizing legislation (for my further discussion of CRA, see Republicans Deploy CRA Authority to Roll Back RegulationsTrump and Congress Use Congressional Review Act to Roll Back 14 ‘Midnight’ Rules; More to Follow? and Republicans to Use CRA to Roll Back ‘Midnight’ Rules and Benefit Oil Companies).

And, as I discussed further in SEC Punts on Unfinished Dodd-Frank Agenda, Thus Avoiding Congressional Review Act, since Trump was inaugurated and the CRA has been more widely deployed, it has had even greater indirect influence, in having a chilling effect on agency actions. With a CRA challenge virtually inevitable, why even bother going through the motions of rule-making? This is a particularly serious problems for the so-called independent agencies, including the SEC, which are supposed to be able to implement more stable and consistent policies across administrations and are (arguably) less subject to direct political control.

Why Did It Take the CFPB So Long to Issue This Rule?

What I still fail to understand is why the CFPB didn’t issue this rule until July 2017– well into the Trump era–thus setting itself up for this entirely predictable and inevitable CRA challenge– a subject I addressed at length in House Votes to Overturn CFPB Mandatory Arbitration Ban:

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.

Just a short aside here. Even if the CFPB had not been so tardy in its rule-making, the rule may still have been scuppered. The lawsuit I predicted would be filed was filed, by parties including the American Bankers Association, the Financial Services Roundtable, and the U.S. Chamber of Commerce. Now that the CRA overturn has occurred, the plaintiffs have duly filed a notice of voluntary dismissal.

Equifax Intervention

Briefly, it appeared that the Equifax hack might have pushed wavering Senators into voting no on the CRA resolution, thus allowing the CFPB ban to stand. The financial industry deployed formidable lobbying muscle to make sure this wasn’t the case.

Further,the Office of the Comptroller of the Currency had come out in support of an overturning the ban; Acting Comptroller of the Currency Keith A. Noreika issued a statement on Wednesday applauding Trump’s action:

Today, President Trump protected consumers and small and midsize banks by repealing a rule that would have cost millions, paved a path to expensive frivolous lawsuits, and lined the pockets of trial lawyers.

The action is a victory for consumers and small and midsize banks across the country because it stops a rule that likely would have significantly increased the cost of credit for hardworking Americans and taken away a valuable tool for resolving differences among banks and their customers. The action today preserves a choice for consumers who can choose among financial providers that offer services with arbitration clauses and those that do not.

The rule would have harmed consumers even as it provided no benefit in deterring bank misbehavior or preventing customer abuse. It is a new day in Washington when policymakers are actually concerned about the consequences that regulations have on working Americans. I applaud Congress and the President for vacating the rule.

The final Senate vote on the CRA resolution was a seeming nailbiter– forcing vice President Pence to cast the deciding vote to overturn (see this Politico account for further details, Pence breaks tie in Senate vote to ax arbitration rule). CFPB director Richard Cordray then tried a final Hail Mary pass– a personal letter to Trump using him not to sign the CRA resolution into law.

Trump Success in Fomenting and Cementing Regulatory Rollback

Trump and the Republican-majority Congress have been heavily criticised for failing to pass any major legislation. Less widely-noticed is the success the administration has thus far achieved in implementing its regulatory rollback agenda (which I have discussed further in
Financial Regulatory Rollback Proceeds
) and methodically and efficiently filling federal judgeships (which I have discussed in Trump Nominates Seventh Round of Federal Judges.

Both trends will be difficult to reverse, in the unlikely event that Democrats get their collective political act together and figure out how to win elections (and dare I hope, even more importantly, promote the policies that many Americans say they support– rather than almost exclusively furthering the agenda and the interests of party donors).

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  1. David

    Many financial services companies require their customers to consent to use mandatory arbitration procedures to settle subsequent disputes, thereby “voluntarily” giving up any right to file or participate in class actions (or any other lawsuit for that matter).

    Not really. From the CFPB’s own study,

    The Study found that most of the arbitration agreements contained a small claims court “carve-out,” permitting either the consumer or both parties to file suit in small claims court.

    There are alternative solutions,

    In the credit card market, the Study found that small bank issuers were less likely to include arbitration agreements than large bank issuers. Likewise, only 3.3 percent of credit unions in the credit card sample used arbitration agreements… In the checking account market, the Study again found that larger banks tended to include arbitration agreements in their consumer checking contracts (45.6 percent of the largest 103 banks, representing 58.8 percent of insured deposits). In contrast, only 7.1 percent of small-and mid-sized banks and 8.2 percent of credit unions used arbitration agreements.

    Yet another reason to use a small bank or credit union.

    1. a different chris

      Not sure where you are going with this? There are alternative solutions, but why does that give them the right to cut off the most threatening (and least used) one. That’s how the world works, “I have a range of options, don’t make me go nuclear”.

      If I can’t make that threat then I’m behind before I even start.

      >another reason to use a small bank or credit union

      Do you think small banks act this way out of the goodness of their hearts?

    2. Jerri-Lynn Scofield Post author

      Thanks for drawing this point to my attention– I’ve corrected the copy to eliminate the parenthetical.

      I point out that a small claims carve out wouldn’t exactly cause your average financial services firm to shake in its boots (if a firm can indeed be personified in this way).

  2. Lyle

    Note that in a lot of cases it is only Class Action suits that worry the financial services folks. Class Action suits are another way for surplus Lawyers to line their pockets as most of the benefits go to the lead lawyer on the case. Many of the cases as an individual would not get a lawyer interested because it would be unprofitable to try the case as an individual i.e. the costs of suing would exceed the potential return on an individual basis. (Which of course is why small claims court is there in the first place).

    1. Jim Haygood

      All true. But mandatory arbitration bars individual plaintiffs from small claims court, a tool which I use enthusiastically when it’s available.

      1. second Post author

        The class action is far from a perfect mechanism, and it’s true lawyers often pocket a good chunk of recoveries. Two points.

        First, plaintiffs’ attorneys operate on a contingency fee basis, and don’t recover in every action. Their fees must be high enough to incentivise them to take on such cases. They often invest significant time and resources before they see any return.

        Before we get to a big back and forth on that point, my second point is this: part of the reason for class actions is not just to allow a low-cost way for those harmed to recover damages (and make it worthwhile to do so when each individual’s loss is just too small for the potential plaintiff to pursue a claim), but also to impose significant enough aggregate damages on a defendant to deter similar behaviour. As to that second goal alone, for deterrence purposes, it doesn’t matter whether the bulk of the recovery goes to the attorneys, r the pains– if the headline number is sufficient high,

      2. lyle

        See David’s comment above that the CFPB study “The Study found that most of the arbitration agreements contained a small claims court “carve-out,” permitting either the consumer or both parties to file suit in small claims court.” So the issue is more the ability to go class action, than small claims court, if the quote is correct.

  3. Jim Haygood

    “The action today preserves a choice for consumers who can choose among financial providers that offer services with arbitration clauses and those that do not.” — Keith Noreika

    Try — just try — to find a SIPC-insured US stock broker without an arbitration clause. There is no such choice.

    Gotta give ol’ Keef credit, though, for catapulting the propaganda despite the unforgiving phalanx of facts which paint his colorful utterances as a pack of preposterous, calculated lies.

    Shoveling sh*t for Satan pays pretty good, don’t it Keef.

    1. David

      The nullified CFPB rule wouldn’t affect stock broker clauses. They’ve got their own organization.

      Also, why wouldn’t one want to, at least, consider arbitrating a dispute? It’s cheaper and faster that going to court.

      FINRA publishes stats for their dispute resolutions,

      How arbitration cases close (2017)
      After Hearing – 13%
      After Review of Documents – 7%
      Direct Settlement by Parties – 53%
      Settled via Mediation – 13%
      Withdrawn – 10%
      All Others – 7%

      83% of the cases were closed before a decision by the arbitrators.

      Average Turnaround time, in months (2017)
      Overall: 14.7
      Hearing Decisions: 17.0
      Simplified Decisions: 6.6

      Try getting the courts to turn a case that fast.

      1. Jerri-Lynn Scofield Post author

        1) Class actions don’t impose costs since the lawyers do them on contingency;
        2) Arbitrators are often thought to be biased toward where they get recurring business (financial firms), and thus against Mom & Pop;
        3) Big class action payout has a greater deterrent effect (see my earlier comment above)– which is particularly important given what paper tigers the feds now are.

        1. David

          I don’t disagree with your comment but;
          1) could be applicable to both arbitration and vanilla lawsuits, and
          2) could be said of certain judges and attorneys. Agree that the ADR system needs lots of work (transparency).
          3) Do Class Actions Deter Wrongdoing?

          Although these studies of class actions and deterrence are not numerous, they are unanimous: class action lawsuits generate general deterrence.
          What about studies of other lawsuits? These studies are numerous. For decades and decades, scholars have studied the data on deterrence, and, for decades and decades, the studies have generally corroborated what the class action studies show:the threat of a lawsuit deters misconduct.

          If one looks at the securities class action litigation histogram, the number of cases appears to correlate very well with the stock market bubbles.
          Does bigger payout = more deterrence? The largest payouts are Enron (2008), WorldCom (2010), Tyco (2013, Cendant (2010), and Nortel (2007). Yet 2017 has the most filings (350) since 2001 (498).

      2. FluffytheObeseCat

        Why wouldn’t one want an alternative dispute resolution method, like arbitration?

        Because the firms that offer ADR are biased in favor of large, well-represented repeat customers. I.e. the service-provider corporations, not the ‘serviced’ individuals they rip off. Turn around time means nothing when the deck is stacked against the little guy. It already is in our courts, and the situation is far worse with private ADR practices.

        1. Jerri-Lynn Scofield Post author

          Agree completely– that’s my point 2 above, but on this point, your answer is better and more comprehensive. I think our comments posted more or less simultaneously, so we may seem to be duelling when we’re actually overlapping.

  4. Chauncey Gardiner

    Thank you for this post. After the public revelations about customer abuses at TBTF’s like Wells Fargo and the earlier decision by the then-Attorney General not to criminally prosecute any TBTF executives for fraud after the 2008 financial collapse, this legislation is unsurprising. The de-regulation agenda by the Trump administration and its congressional allies, together with its judicial and agency appointments, are designed and intended to restore and preserve an enabling environment that has proven to be very damaging to ordinary Americans.

    1. JBird

      In otherwords, justice, fairness, legal protections, and being treated like a human being instead of monetary prey is for our betters; Socialism for the rich, and Social Darwinism for everyone else. Got it.

      Interesting it is that even when I get into online “discussions” with libertarians, free market capitalists, alt-right, liberals, and others we all seem to agree on everyone is getting shafted by the elites especially rich ones. I wonder how much the various political and financial elites realize this.

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