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 Regulations, Trump 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.
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).