CFPB’s Assault on Arbitration Stuck Between Rock, Hard Place

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By Gregory Roberts

Consumer groups eager for the Consumer Financial Protection Bureau to put into effect its proposed ban on mandatory arbitration clauses face something of a Catch-22.

Any move by the CFPB to adopt a final version of its rule would almost certainly prompt Republican lawmakers to overturn it, with a long-term chilling effect on future regulation of the clauses used by banks and other financial services providers.

But if the CFPB does not put out a final rule before the term of the bureau’s director, Democratic appointee Richard Cordray, expires in mid-2018, then whomever Republican President Donald Trump picks to lead the bureau isn’t likely to go ahead with the rule, anyway.

“We’re hoping that the rule would go forward, but given the political environment, it doesn’t necessarily seem that it might do that,” Linda Sherry, director of national priorities for Consumer Action, told Bloomberg BNA. “But we’re hopeful, and we’re certainly pushing for getting a rule out there.”

Stuck in what is likely to be a permanent state of limbo, consumer advocates can do little more than plead with companies to eliminate the clauses themselves, as a coalition of groups did in a Feb. 24 letter to Wells Fargo.

At issue are contract clauses that authorize a company to submit most disputes with customers to private arbitration. The clauses block a disgruntled customer from joining in a group arbitration claim or from taking the dispute to court, where the customer potentially could be part of a class-action lawsuit.

Companies began including the clauses in the 1990s in an effort to head off costly class actions that the companies say benefit plaintiffs’ lawyers more than plaintiffs. Opponents of the clauses say the contract language squelches one of the only effective deterrents to corporate misbehavior.

Study Ordered by Law

The 2010 Dodd-Frank Act that created the CFPB directed the bureau to study the clauses, which are widely used in contracts for credit cards, bank accounts and other financial services. The bureau conducted the study and in 2016 proposed a rule that would prohibit companies from barring class-action lawsuits. The bureau collected public comments on its proposal and says it is reviewing them, with no estimate provided for when it might issue a final rule.

If the CFPB did publish a final rule, the way would be open for Congress and Trump to set the rule aside—and indefinitely foreclose future consideration of arbitration-clause regulations. The vehicle for that is the 1996 Congressional Review Act (CRA), which was used just once before Trump took office but has been applied repeatedly since his inauguration Jan. 20.

The CRA provides for Congress to repeal a federal regulation via a majority vote in each house and the president’s signature. Most actions by Congress to do so have been empty gestures, vetoed by a president uninterested in overturning a rule put forth by his own administration. The one exception before this year occurred in 2001, when Republicans who had taken over Congress and the White House set aside a workplace ergonomics rule issued by the preceding administration of Democrat Bill Clinton.

Congress must act within 60 legislative days after a rule is finalized to override it, under the CRA. What adds extra bite to the law is a provision that says if a regulation is quashed under the law, no substantially similar rule can be issued in the future without specific authorization from Congress.

“I think the reason we haven’t seen a final rule is because of that concern,” lawyer Alan Kaplinsky said. Kaplinsky, head of the Consumer Financial Services Group at Ballard Spahr LLP, played a leading role in popularizing use of the arbitration clauses.

Cordray was named to a five-year term by Trump’s Democratic predecessor, Barack Obama, and the CFPB director cannot be removed except for cause, although that protection is currently under a court challenge. In any case, his successor will be chosen by Trump.

“As a practical matter, if Cordray doesn’t try to issue a final rule, it’s never going to happen,” Kaplinsky said. “The odds are in our favor, and have been ever since the election, that there won’t be a rule.”

Republican antipathy to the CFPB’s proposed rule is plain: The Republican-sponsored Dodd-Frank overhaul bill introduced in the 2015-16 Congress—and expected to serve as a model for a renewed effort his year—specifically blocked CFPB action on forced-arbitration clauses.

Consumer Action and 20 other organizations wrote Wells Fargo last month to protest the megabank’s efforts to invoke forced arbitration clauses in legal disputes, including those arising from the well-publicized scandal that involved the bank’s defrauding of its customers by creating bogus accounts without the customers’ knowledge or approval.

“We call on Wells Fargo to do the right thing, and to immediately cease using forced arbitration clauses,” the groups wrote.

To contact the reporter on this story: Gregory Roberts in Washington at gRoberts@bna.com

To contact the editor responsible for this story: Michael Ferullo at MFerullo@bna.com

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