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War over CFPB escalates with legal threats and arbitration demands

Joe Mont | August 2, 2017

The Consumer Financial Protection Bureau’s recent rule banning the use of mandatory arbitration clauses is being leveraged by critics to demand the ouster of Director Richard Cordray.

Many consumer financial products like credit cards and bank accounts have arbitration clauses in their contracts that prevent consumers from filing class-action lawsuits and require the use of arbitration. The 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 class action lawsuits, a CFPB statement explains. The CFPB’s rule restores consumers’ right to file or join group lawsuits. Companies can still include arbitration clauses in their contracts, but may not use arbitration clauses to stop consumers from being part of a group action. The rule includes specific language that companies will need to use if they include an arbitration clause in a new contract.

Jeb Hensarling, the Texas Republican who heads the House Financial Services Committee, had threatened Cordray with Congressional contempt charges if he moved forward with it.

Hensarling is also challenging Corday’s authority by asking President Trump to fire him. The reasons cited: alleged ineptitude on investigating unauthorized accounts created by sales teams at WellsFargo; allegedly lying to Congress about the effectiveness of those investigations; and that the director has violated the Hatch Act for reportedly running for governor of Ohio while still employed by a federal agency.

“The CFPB has gone rogue again, abusing its power in a particularly harmful way,” Sen. Tom Cotton (R-Ark.) said in a statement following the July 11 announcement of the arbitration rule. He later initiated the process of rescinding the rule using the Congressional Review Act.

The CRA. It provides a 60-day period following agency publication of a regulation during which an expedited Senate or bicameral vote can halt implementation. If a rule is disapproved after going into effect, it is treated as though it had never taken effect.

Cotton’s bill has passed in the House of Representatives and companion legislation is awaiting a vote in the Senate. That vote is expected in September.

In the meantime, a group of 19 state attorneys general and the District of Columbia attorney general have sent a letter to Senate Majority Leader Mitch McConnell and Senate Minority Leader Charles Schumer expressing the their “strong opposition” to that bill, S.J. Res. 47. 

“The CFPB’s Arbitration Rule would deliver essential relief to consumers, hold financial services companies accountable for their misconduct, and provide ordinary consumers with meaningful access to the civil justice system,” the letter says. “While the financial services industry promotes arbitration, the truth is that most of their consumers can’t afford it. When financial services companies require their customers to use individual arbitration to address their complaints or disputes, most consumers simply lack the time and resources to arbitrate a dispute on their own or to hire an attorney to file a claim on their behalf. This is especially true where consumers have been defrauded out of small amounts of money.”

The letter quotes Judge Richard Posner of the Seventh Circuit Court of Appeals: “only a lunatic or a fanatic sues for $30.” If consumers cannot join class actions, the result is “not 17 million individual suits, but zero individual suits.”

 

“For most consumers, an individual arbitration claim is just as daunting as an individual lawsuit,” the letter adds.

Acting Comptroller of the Currency Keith Noreika, a staunch critic of the rule, has also weighed in with a July 31 statement.

“The Office of the Comptroller of the Currency has only begun its review of the CFPB’s data and analysis underlying that agency’s Final Rule. Nothing so far diminishes my concerns that the rule may adversely affect the institutions within the federal banking system and their customers,” he wrote.

“The final rule prevents banks from using an effective risk mitigation tool and will eliminate one option consumers have to resolve their concerns without the cost and delay of litigation,” Noreika wrote. “Ultimately, the rule may have unintended consequences for banking customers in the form of decreased availability of products and services, increased related costs, fewer options to remedy consumer concerns, and delayed resolution of consumer issues. The rule may turn out to be the proverbial straw on the camel’s back.”

It is important that the OCC economists take the time necessary to conduct their independent review of the data and analysis used to support and develop the Final Rule, Noreika explained, adding that “unfortunately, since the CFPB published the rule in the Federal Register prior to providing its data for our analysis and we have requested additional data in order to conduct a thorough review,” the OCC cannot complete a thorough review in the limited time before a petition must be filed with the Financial Stability Oversight Council, pursuant to Section 1023 of the Dodd-Frank Act.

Given that Congress is considering use of the Congressional Review Act to overturn the CFPB’s Final Rule, “I will not petition the FSOC to stay the effective date of the rule,” he added. “I hope Congress will act on this opportunity to preserve effective alternatives for consumers to resolve their disputes without lengthy and costly litigation and to reduce the piling on of legal and regulatory burden.”