by Brian J. Malcom, Waller
On Nov. 1, in an encouraging development for banks and financial institutions, President Trump signed a repeal of the Consumer Financial Protection Bureau’s (CFPB) rule prohibiting forced arbitration. The CFPB developed the rule to prevent banks and credit card companies from requiring arbitration in their customer agreements, effectively terminating a customer’s ability to join class action lawsuits against the financial institutions. Congress already prohibits arbitration agreements in the residential mortgage market, so the rule did not apply to mortgage finance. Not only does the action by Congress and the president scrap this rule, but it also prevents the CFPB from writing a “substantially similar” rule down the road without congressional action.
The repeal passed the Senate by the thinnest of margins, 51-50, with Vice President Pence casting the tie-breaking vote in favor of repeal. The CFPB released the rule in July 2017, and the Republican-controlled Congress immediately began efforts to overturn it. Ultimately, Senate Republicans used an obscure legislative process called the Congressional Review Act, which allows lawmakers to overturn a recently finalized rule by a majority vote.
The GOP opposition to the rule was supported by the Treasury Department, which released a report stating that the CFPB’s arbitration rule would “impose extraordinary cost,” roughly $500 million in additional legal fees that would largely go to plaintiffs’ lawyers. That followed another agency, the Office of the Comptroller of the Currency, which also claimed that the rule would raise legal costs for banks with no significant benefit to the consumer. The Trump Administration also took the position that the CFPB Rule would cost consumers more money and would only benefit trial lawyers.
Community banks largely opposed the CFPB Arbitration Rule, because the rule impaired community banks’ contractual rights to seek fair and timely resolution of disputes through the arbitration process. Community banks view a restriction on arbitration with their customers as a slippery slope for increasingly costly and protracted litigation.
Not surprisingly, the CFPB took the opposite view of the rule’s effect. Then-CFPB Director Richard Cordray said “in signing this resolution, the president signed away consumers’ right to their day in court.” The CFPB believes banks use arbitration rules as a method of avoiding liability and class actions. In its July 10, press release announcing the rule, the CFPB said the following:
Hundreds of millions of contracts for consumer financial products and services have included mandatory arbitration clauses. These clauses typically state that either the company or the consumer can require that disputes between them be resolved by privately appointed individuals (arbitrators) except for individual cases brought in small claims court. While these clauses can block any lawsuit, companies almost exclusively use them to block group lawsuits, which are also known as “class action” lawsuits. With group lawsuits, a few consumers can pursue relief on behalf of everyone who has been harmed by a company’s practices. Almost all mandatory arbitration clauses force each harmed consumer to pursue individual claims against the company, no matter how many consumers are injured by the same conduct. However, consumers almost never spend the time or money to pursue formal claims when the amounts at stake are small.
Director Cordray took the position that repeal of the rule tipped the scales in the favor of Wall Street at the expense of the consumer and pointed to the recent financial crisis as a warning. He went on to say, “[b]y blocking [the CFPB’s] arbitration rule, this action makes it nearly impossible for ordinary people to stand up for themselves against corporate giants.”
The numbers, however, simply do not support the CFPB’s position. As The Hill recently reported, “[t]he CFPB’s data tell us that while 53 percent of credit card issuers use arbitration clauses today, nothing in the data demonstrates that the 47 percent that do not to use arbitration clauses have fewer compliance issues, behave better, or treat their customers better in meaningful ways.” In the absence of data indicating that mandatory arbitration clauses are resulting in abuses against consumers or an unfair advantage to banks or financial institutions, the CFPB should not impose a rule resulting in significant financial burden on banks or financial institutions.
Notably, Acting Comptroller of the Currency Keith Noreika opposed the rule, saying, “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,” said Noreika.
The current regulatory framework makes survival difficult for community banks. The CFPB’s arbitration rule would have added to that difficulty by increasing costs and exposing community banks to unwieldy litigation in courts. In the absence of any proof that arbitration clauses in customer agreements stifle legitimate customer disputes against financial institutions, the government acted prudently by relieving banks and financial institutions from the burden of those increased costs.
Brian J. Malcom is a partner at Waller in Birmingham. Top banks and financial institutions seek his counsel in all areas of litigation, including contract disputes, trust and fiduciary litigation, consumer claims, and bond and warrant claims. Brian was profiled in 2017 by the Birmingham Business Journal as one of Birmingham’s Rising Stars of Law.
