WASHINGTON, D.C. — The Consumer Financial Protection Bureau’s new rule banning mandatory arbitration clauses in finance contracts was published in the Federal Register on Wednesday, July 19, thereby setting the rule’s effective date. House and Senate Republicans responded the next day by filing joint resolutions of disapproval under the Congressional Rule Act (CRA).

The new rule is due to go into effect September 18. It applies to contracts signed 180 days after the effective date, or March 19. The Senate challenge was filed on July 20 by U.S. Senate Banking Committee Chairman Mike Crapo (R-Idaho) and 23 other Republican Senators. The U.S. House of Financial Services Committee filed its resolution, Res. 111, the same day, with the full House expected to vote on the resolution today after the House Rules Committee approved it by a 9-4 vote.

“The CFPB’s anti-arbitration rule hurts consumers, and it’s another example of the problems caused by this rogue and unaccountable agency,” said Rep. Keith Rothfus (R-Pa.), the resolution’s sponsor. “We know that consumers get better results through arbitration than through class-action lawsuits. Despite the fact that the agency acknowledged this fact in one of its own reports, the bureaucrats at the CFPB have decided they know better.”

Under the CRA, Congress can block rules issued by federal agencies by enacting a joint resolution of disapproval within 60 days after receiving the rule. If both houses pass the joint disapproval resolution and it receives the president’s signature, the resolution becomes law and the rule becomes “of no force and effect.”

Rothfus’ resolution, which was cosponsored by all 34 Republican members of the Financial Services Committee, is likely to gain full House approval. The Senate resolution, however, isn’t so likely, as Republicans hold a slim 52-48 advantage in the Senate. Vice President Mike Pence holds the tiebreaking vote.

“As a matter of principle, policy and process, this anti-consumer rule should be thoroughly rejected by Congress, and I applaud Congressman Rothfus for leading the effort in the House to do just that,” said Rep. Jeb. Hensarling, who has crusaded against the CFPB as chairman of the House Financial Services Committee. “In the last election, the American people voted to drain the D.C. swamp of capricious, unaccountable bureaucrats who wish to control their lives. This CRA is a critical step towards fulfilling our promise to the American people and truly protecting consumers.”

Congressional Republicans aren’t the only ones who have express concerns about the CFPB’s new rule.

In a July 10 letter addressed to CFPB Director Richard Cordray, Acting Comptroller of the Currency Keith Noreika asked the CFPB head to delay publishing the final arbitration rule in the Federal Register until his staff had “a full and fair opportunity to analyze the CFPB data so that I am able to fulfill my safety and soundness obligations.”

“As a prudential regulator for the federal banking system, the OCC should be granted the opportunity to conduct an independent review of the CFPB data to determine the safety and soundness implications of the final rule. I will make every effort to expedite that review,” Noreika wrote.

Cordray responded two days later. “I was surprised to receive your letter,” he wrote, noting that the issuance of the rule marked the conclusion of a multiyear process that included the bureau’s completion of its arbitration study in March 2015. “The rulemaking process itself spanned more than two years. Throughout the process, the bureau consulted repeatedly with representatives of the staff of the Office of the Comptroller of the Currency, as well as the other prudential regulators, precisely to discuss ‘prudential, market, or systemic objectives by such agencies’ in accordance with Section 1022 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

“At no time during this process did anyone from the OCC express any suggestion that the rule that was under development could threaten the safety and soundness of the banking system,” he added, noting that OCC staff issued an email on June 26 confirming the agency has no comments after reviewing a draft of the rule. “Nor did you express any such concerns to me when we have met or spoken.”

Under the CFPB’s arbitration rule, companies can still include arbitration clauses in finance contracts. However, creditors subject to the rule can’t use arbitration to stop consumers from being part of a group action. The rule also includes specific language companies will need to use if they include an arbitration clause in a new contract.

The rule also requires companies to submit to the CFPB certain records, including initial claims and counterclaims, answers to these claims and counterclaims, and awards issued in arbitration. The bureau will also collect correspondence companies receive from arbitration administrators regarding a company’s nonpayment of arbitration fees and its failure to follow the arbitrator’s fairness standards.

Bureau officials said the collected materials, which must be submitted with appropriate redactions of personal information, will allow it to better understand and monitor arbitration. They will also be published on the CFPB’s website beginning in July 2019.

The new rule applies to the major markets for consumer financial products and services overseen by the bureau, including those that lend money, store money, and move or exchange money. Congress already prohibits arbitration agreements in the residential mortgage market and has done the same in many forms of credit extended to servicemembers and their families.

Exempted from the new rule are employers who offer consumer financial products or services for employees as an employment benefits; entities regulated by the Securities and Exchange Commission or the Commodity Futures Trading Commission, which have their own arbitration rules; broker-dealers and investment advisers overseen by state regulators; and state and tribal governments that have sovereign immunity from private lawsuits.

“Originally, arbitration was primarily used for disagreements between two businesses. But over the last quarter-century or so, companies started adding arbitration clauses to their consumer contracts, specifically to block group lawsuits and avoid legal accountability,” Cordray said on July 10, the day the bureau announced its arbitration rule. “… Today’s rule prohibits banks and other consumer financial companies from including mandatory arbitration clauses that block group lawsuits in any new contracts after the compliance date.

“… By restoring the ability of consumers to file or join group lawsuits, the rule gives companies more incentive to comply with the law,” he added. “And the deterrent effect of such cases can more broadly influence the business practices of other companies as well.”

Originally posted on F&I and Showroom

About the author
Gregory Arroyo

Gregory Arroyo

Editorial Director

Gregory Arroyo is the former editorial director of Bobit Business Media's Dealer Group.

View Bio