On June 10, 2017, the Consumer Financial Protection Bureau (CFPB) published a final rule attacking the use of class action waivers in arbitration clauses in certain consumer contracts. The new rule prohibits covered providers of consumer financial products or services, such as credit cards and bank accounts, from using arbitration clauses in consumer contracts to require consumers to resolve their disputes individually, rather than on a classwide basis. Specifically, the rule prevents financial services providers from including arbitration clauses in consumer contracts unless such clauses permit plaintiffs to file or participate in class actions. The rule also contemplates requiring companies to explain the rule in any covered arbitration clause, effectively directing consumers to the availability of class action litigation as an alternative to arbitration. Finally, the rule will require covered providers that are involved in an arbitration pursuant to a pre-dispute arbitration agreement to submit various “arbitral records” to the CFPB, and it provides that such records will be made publicly available “with appropriate redactions” by the CFPB.
Many across the financial services industry have anticipated a final version of this rule for some time now; after all, the CFPB’s action comes after more than 110,000 comments were submitted in response to the May 2016 proposed rule. Indeed, we previously posted about the proposed rule subsequent to its release for comment. But whether the final rule will actually take effect is another question. The rule, which the CFPB believes is beneficial to consumers, comes at a time when Republicans control both the Executive and Legislative branches, rendering its future unknown, particularly in light of the ever-increasing buzz surrounding the Congressional Review Act.
Enacted in 1996, the Congressional Review Act provides an expedited process by which Congress, by enacting a Joint Resolution of Disapproval, can exercise its general legislative powers to override or abolish a rule or regulation lawfully promulgated by an executive branch agency. To qualify for expedited consideration, a member of either house must submit a Joint Resolution of Disapproval of an agency rule within 60 legislative working days after receiving the rule from the corresponding agency. In the Senate, a Resolution of Disapproval is not subject to a filibuster, meaning that Democratic Senators cannot simply delay the Resolution of Disapproval until the Congressional Review Act’s 60-day review period expires. If both houses pass the resolution and the President does not veto it, the resolution becomes law, and the rule becomes “of no force and effect” immediately.
To date, at least two Republican Congressman have publicly stated their opposition to the rule and their intentions to disapprove the rule via the Congressional Review Act. Arkansas Senator Tom Cotton released a statement in which he opined that the rule ignores the consumer benefits of arbitration and that on July 11, 2017, he “started the process of rescinding this rule using the Congressional Review Act.” Furthermore, House Financial Services Committee Chairman Jeb Hensarling stated on the Committee website that the rule “should be thoroughly rejected by Congress under the Congressional Review Act.”
Whether class action litigation is more beneficial to consumers than the availability of an individualized arbitration process is debatable. In a recent study of 432 class action lawsuits, Professor Joanna Shepherd opined that consumer class action cases are usually beneficial to the consumers’ class counsel, but offer little value to class members themselves. See, e.g., Shepherd, Joanna, An Empirical Survey of No-Injury Class Actions (February 1, 2016). Emory Legal Studies Research Paper No. 16-402. Available at SSRN: https://ssrn.com/abstract=2726905 or http://dx.doi.org/10.2139/ssrn.2726905.
While there is question about whether the rule will actually take effect, it is certain that the Congressional fight will place financial companies’ use of mandatory arbitration clauses in the national spotlight. In light of increased attention to these contract provisions, many financial companies have already reviewed their arbitration clauses and practices, and all companies with consumer contracts that may be subject to the rule should consider its implications.