United States: Congress Overturns CFPB Arbitration Rule

On the afternoon of Nov. 1, President Donald J. Trump signed H.J. Res. 111, completing the process under the Congressional Review Act to disapprove the Consumer Financial Protection Bureau (CFPB)'s Consumer Arbitration Rule (the Rule). President Trump's action follows the late-night vote on Oct. 25 in which the Senate narrowly passed the joint resolution to overturn the Rule.[1] Vice-President Mike Pence cast the tie-breaking vote effectively ending the controversial Rule that was several years in the making.

Initially proposed on May 6, 2016, and issued on July 19, 2017, the Rule forbade providers of covered consumer financial products and services from inserting in contracts arbitration clauses that prohibit the consumer from filing or participating in a class action lawsuit. Based on a CFPB study on arbitration agreements, which was published in March 2015, the Rule sought to ensure consumers could file or participate in class actions to challenge allegedly wrongful conduct by financial institutions. Supporters lauded the Rule as allowing for more effective access to justice, arguing class action litigation produced more consumer-friendly outcomes than individual arbitrations. Critics argued that providers would see a significant increase in class action lawsuits, and the costs incurred in defending the claims would be shifted to the consumer in the form of higher costs and fees.

To overturn the Rule, Congress relied upon the Congressional Review Act, which authorizes Congress to overturn a rule promulgated by a federal agency within 60 "legislative days."[2] If overturned, such a rule is without "force and effect." A resolution to overturn the Rule was introduced by Rep. Keith Rothfus, R-Pa., in the House and Sen. Tom Cotton, R-Ark., in the Senate. The House voted to overturn the Rule on July 25 – five days after the resolution was introduced.

The Rule also prompted a public exchange between the Office of the Comptroller of the Currency (OCC) and the CFPB. OCC Acting Comptroller Keith A. Noreika urged CFPB Director Richard Cordray to delay releasing the Rule in the Federal Register and to continue to study the Rule's effects. Noreika expressed concern about the impact the Rule could have on the safety and soundness of financial institutions, due, in part, to the "potentially ruinous liability" class actions can create for defendants.[3] In a series of letters, Cordray and Noreika discussed those concerns.[4]

Days before the final vote, Noreika authored an op-ed in The Hill arguing that the CFPB failed to disclose data demonstrating that banning mandatory arbitration agreements would lead to increased costs to consumers.[5] Noreika asserted that OCC economists' review of the data found an 88 percent likelihood of an increase in the total cost of credit by 3.5 percentage points.[6] Director Cordray swiftly responded in a letter to Senator Sherrod Brown, D-Ohio, criticizing the OCC's position and taking aim at the statistical analysis the OCC relied upon.[7] Cordray also wrote an op-ed in The Hill.[8]

Predictably, reaction to the joint resolution has been divided between consumer advocates and the financial services industry. Consumer advocates decried the repeal, and Director Cordray called the action "a giant setback for every consumer in this country." Financial services advocates, on the other hand, had criticized the Rule as nothing more than a boon for the plaintiff's bar, and thus cheered the Rule's demise.

Going forward, financial institutions are not likely to see the increase in consumer class actions that may have resulted had the Rule been implemented. American Tort Reform Association Communications Director Darren McKinney, writing in The Wall Street Journal, notes the Treasury Department had projected a $500 million cost to businesses over three years to defend against the 3,000 projected federal class actions that would have been filed in the wake of the Rule's implementation.[9] Those costs likely would have been passed on to consumers in numerous ways, including in the form of increased cost of credit, though the CFPB strongly disputed this prediction. Also, financial institutions now may avoid incurring compliance costs to update customer agreements and train employees in anticipation of what would have been the Rule's March 2018 effective date.


[1] H.R.J. Res. 111, 115th Cong. (2017).

[2] 5. U.S.C. § 801(a). Covered rules must also be submitted to the Comptroller General. Id.

[3] Letter from Acting Comptroller of the Currency Keith A. Noreika to The Hon. Richard Cordray, Director, Consumer Financial Protection Bureau, p. 1 (July 10, 2017), available at https://finservblog.bakerhostetlerblogs.com/wp-content/uploads/sites/20/2017/11/07-10-2017.pdf.; letter from Richard Cordray, Director, Consumer Financial Protection Bureau, to Acting Comptroller of the Currency Keith A. Noreika (July 18, 2017), available at https://finservblog.bakerhostetlerblogs.com/wp-content/uploads/sites/20/2017/11/07-18-2017.pdf.

[4] Letter from Richard Cordray, Director, Consumer Financial Protection Bureau to Acting Comptroller of the Currency Keith A. Noreika, p. 1 (July 12, 2017), available at https://finservblog.bakerhostetlerblogs.com/wp-content/uploads/sites/20/2017/11/07-12-2017.pdf; letter from Acting Comptroller of the Currency Keith A. Noreika to The Hon. Richard Cordray, Director, Consumer Financial Protection Bureau (July 17, 2017); available at https://finservblog.bakerhostetlerblogs.com/wp-content/uploads/sites/20/2017/11/07-17-2017.pdf; letter from Richard Cordray, Director, Consumer Financial Protection Bureau, to Acting Comptroller of the Currency Keith A. Noreika (July 18, 2017), available at https://finservblog.bakerhostetlerblogs.com/wp-content/uploads/sites/20/2017/11/07-18-2017-1.pdf.

[5] Noreika, K. Senate Should Vacate the Harmful Consumer Banking Arbitration Rule, The Hill, Oct. 13, 2017, available at http://thehill.com/opinion/finance/355274-cfpb-rule-increases-consumer-costs-and-makes-banks-less-safe.

[6] Id.

[7] Letter from Richard Cordray, Director, Consumer Financial Protection Bureau, to Senator Sherrod Brown (Oct. 13, 2017), available at https://finservblog.bakerhostetlerblogs.com/wp-content/uploads/sites/20/2017/11/10-13-2017.pdf.

[8] Cordray, R. The Truth About the Arbitration Rule Is It Protects American Consumers, The Hill, Oct. 16, 2017, available at http://thehill.com/opinion/finance/355562-the-truth-about-the-arbitration-rule-is-it-protects-american-consumers.

[9] McKinney, D. Richard Cordray's Surprising Admission (Oct. 25, 2017), available at https://www.wsj.com/articles/richard-cordrays-surprising-admission-1508970092.

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