A regulatory ban on the mandatory arbitration clauses widely used by financial services firms is now a thing of the past.

The Senate voted Tuesday night to eliminate the Consumer Financial Protection Bureau’s embattled rule. Vice President Mike Pence broke what was a 50-50 split, largely along party lines. Only two Republicans voted against the repeal, South Carolina’s Lindsey Graham and John Kennedy of Louisiana.

The House of Representatives had already voted in favor of the repeal earlier this year.

The Consumer Financial Protection Bureau’s rule banning companies from using mandatory arbitration clauses was finalized in July. I immediately faced repeal under the Congressional Review Act.  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.

“Arbitration clauses in contracts for products like bank accounts and credit cards make it nearly impossible for people to take companies to court when things go wrong,” Cordray said in a statement at the time the rule was finalized. “These clauses allow companies to avoid accountability by blocking group lawsuits and forcing people to go it alone or give up. Our new rule will stop companies from sidestepping the courts and ensure that people who are harmed together can take action together.”

The CFPB’s rule restored 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 included specific language that companies will need to use if they include an arbitration clause in a new contract.

The bill authorizing the rule’s repeal, H.J. Res. 111, must be signed by President Trump, an action is a mere formality given a statement issued by the White House.

“The evidence is clear that the CFPB's rule would neither protect consumers nor serve the public interest,” it said. “Rather, under the rule, consumers would have fewer options for quickly and efficiently resolving financial disputes. Further, the rule would harm our community banks and credit unions by opening the door to frivolous lawsuits by special interest trial lawyers.”

 “By repealing this rule, Congress is standing up for everyday consumers and community banks and credit unions, instead of the trial lawyers, who would have benefited the most from the CFPB's uninformed and ineffective policy,” the statement added.

Among those praising the Senate vote is the U.S. Chamber of Commerce.

“We applaud both houses of Congress for taking action to pull back a rule that would have benefited the class action trial bar at the expense of American consumers and businesses alike,” said President and CEO Thomas J. Donohue.

The U.S. Chamber sent “a key vote letter” to Senators prior to the vote on this measure, which is available online here.

“Even though this regulation is directed at financial firms, the CFPB’s rule impacts businesses of all types that the Bureau believes touch consumer finance, even mobile telephone service providers and website operators,” Jack Howard, senior vice president of Congressional and public affairs, wrote. “This rule is the latest far-reaching regulatory act by the agency. Rather than taking a careful and measured approach that respects traditional checks and balances, the CFPB chose to take advantage of a questionable statutory structure that exempts it from the limits that apply to every other regulatory agency.”

The CFPB has been “operating under a cloud of illegitimacy” since its structure was found to be unconstitutional by a panel of the Court of Appeals for the D.C. Circuit, he added.

 “The CFPB decided to issue a regulation that interferes with freedom of contract, imposes new burdensome regulations, hurts consumers, and rewards class action lawyers. Congress should assert its prerogatives and overturn this illegitimate rule,” the letter concluded.

The consumer watchdog Allied Progress, on the other hand, said the vote “gives companies like Wells Fargo and Equifax a ‘get out of jail free card.’”

on forced arbitration. The rule would have protected consumers who have been taken advantage of by big banks and other financial interests from being forced into secret arbitration tribunals where industry calls the shots and consumers hardly stand a chance.

“This repeal will hurt millions of consumers across the country by denying them their rightful day in court when they get screwed over by financial predators,” said Karl Frisch, executive director of Allied Progress. “It’s clear why Senate Republicans passed this bill, because they care more about the big banks and financial institutions that have funded their campaigns than protecting consumers.”                                                                                               

Prior to the vote, the rule inspired a three-way battle among regulatory agencies and their heads.

Acting Comptroller of the Currency Keith Noreika directly challenged the CFPB’s report on arbitration usage and costs with research of its own that detailed alleged flaws and hidden costs.

Noreika escalated matters during am Oct. 5 speech before the Midsize Bank Coalition of America.

 “Our economists found that despite the CFPB’s statement that analysts could not find any evidence to indicate that banning mandatory arbitration agreements would increase costs to consumers, the Bureau’s data actually shows that there is an 88 percent chance of the total cost of credit increasing, and the expected increase is almost 3.5 percentage points,” he said.

In an Oct. 13 letter to Sen. Sherrod Brown, the lead Democrat on the Senate Banking Committee, CFPB Director Cordray shot back.

“The CFPB’s Office of Research analyzed the OCC review and found that it is based on flawed statistics and is contradicted by publicly available historical data that the OCC did not consider,” he wrote.

On Oct. 23, one day before the Senate vote, the treasury Department entered the fray with a report of its own. The title made it abundantly clear which side of the debate it was on: “Limiting Consumer Choice, Expanding Costly Litigation: An Analysis of the CFPB Arbitration Rule.”

The report’s conclusions:

the CFPB’s rule will impose extraordinary costs—generating more than 3,000 additional class action lawsuits over the next five years, imposing more than $500 million in additional legal defense fees, and transferring $330 million to plaintiffs’ lawyers;

the CFPB’s data show that the vast majority of class action lawsuits deliver no relief to the class—and that consumers very rarely claim relief available to them;

the CFPB did not show that its rule will achieve a necessary increase compliance with the federal consumer financial laws, despite the rule’s high costs; and

the CFPB failed to consider less onerous alternatives to its ban on mandatory arbitration clauses across market sectors.

“As Congress voted, CFPB was wrong and Treasury was right,” said David Bizar, chair of the Consumer Financial Services Litigation practice group of law firm Seyfarth Shaw. “The demise of the CFPB’s ill-considered arbitration class-action waivers ban will benefit both consumers and industry, and the only real losers are the lawyers who would have profited from all of the litigation that would have ensued if the ban had gone into effect.” 

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