On July 10, 2017, the Consumer Financial Protection Bureau (CFPB) issued a new rule that would make it easier for consumers to bring class action lawsuits against financial institutions. The new rule bans financial institutions from using mandatory arbitration clauses in consumer contracts to prevent and avoid class action lawsuits. If the new rule goes into effect, it would apply to all new contracts involving consumer financial products and services, such as credit cards, bank accounts, and auto leases. The rule does not cover consumer mortgages because Congress already prohibits arbitration agreements in the residential mortgage market.
The rule would also require financial institutions to submit to the CFPB redacted copies of arbitration-related records concerning the covered consumer financial products or services, including the initial claim and any counterclaim, the arbitration agreement, and any arbitration award, within 60 days of the date that the record was filed with the arbitrator, arbitral administrator, or court. The CFPB intends to publish these records on its website “to provide greater transparency into the arbitration of consumer disputes.” The rule was published in the Federal Register on Wednesday, July 19 and will go into effect 60 days later.
That is, of course, if the rule isn’t undone. Since the CFPB announced the final rule on July 10, 2017, it has been under attack – first by the acting Comptroller of the Currency and more recently by Republican members of Congress.
The very same day as the CFPB announcement, Keith A. Noreika, the acting Comptroller of the Currency appointed by President Trump in May 2017, sent a letter to the CFPB to raise “safety and soundness concerns” about the new arbitration rule and to ask the CFPB to work with the Office of the Comptroller of the Currency (OCC) to probe those concerns. Noreika also intimated that he would use section 1023 of the Dodd-Frank Act to kill the arbitration rule.
Section 1023 of the Dodd-Frank Act allows the Financial Stability Oversight Council (FSOC) – a 10-member panel of regulators including the Comptroller of the Currency and the CFPB Director – to set aside CFPB rules if they put the safety, soundness, or stability of the banking system at risk. If the arbitration rule is going to be challenged under that process, a petition for FSOC review must be filed within 10 days after the rule’s publication – i.e., by July 28, 2017.
Richard Cordray, Director of the CFPB, responded to the Comptroller’s letter on July 12, 2017, stating that he “was surprised to receive your letter” given that the rule was the result of a “multi-year process,” in which the CFPB consulted with the OCC, which did not express any suggestion that the rule could threaten the safety and soundness of the banking system. Director Cordray’s letter also highlighted a few key points about how the “rule is designed to prevent exactly the type of unlawful conduct that itself can raise safety and soundness concerns, as it did in the lead-up to the financial crisis.” Director Cordray also noted that the final rule had already been sent to the Office of the Federal Register for publication.
Comptroller Noreika replied by letter on July 17, 2017 asking Director Cordray to delay publishing the rule in the Federal Register until the OCC could review the rule’s underlying data to allay safety and soundness concerns. The rule has since been published. No petition for review has been submitted to the Financial Stability Oversight Council to set aside the rule – yet.
Congress, on the other hand, has already begun working on eliminating the rule. On Thursday, July 20, 2017, Republican members of the House Financial Services Committee introduced a Congressional Review Act Joint Resolution of Disapproval to nullify the CFPB’s arbitration rule. Republican senators intend to do the same. The Congressional Review Act provides that a new regulation will not go into effect if a simple majority in both houses of Congress enacts a “joint resolution of disapproval” within 60 days of the publication of the regulation. Congressional critics of the CFPB rule have until September 17, 2017 to kill the new CFPB rule.