By George H. Friedman, SAA Publisher & Editor-in-Chief
The comment period closed recently on the Petition for Proposed Rulemaking filed by a coalition of leading consumer advocacy groups, urging the Consumer Financial Protection Bureau (“CFPB”) to promulgate a rule allowing financial consumers the option to arbitrate after a dispute arises. Just 32 comments were filed, pretty much along expected party lines.
As reported in SAA 2023-37 (Sep. 28), the National Association of Consumer Advocates (NACA), Public Citizen, the American Association for Justice (AAJ), Public Justice, the National Consumer Law Center (“on behalf of our low income clients”), Consumer Federation of America (CFA), the UC Berkeley Center for Consumer Law & Economic Justice, Americans for Financial Reform, and Better Markets, Inc. (ed: listed in the order in which they appear in the Petition), filed the Petition for Rulemaking on September 14. Specifically, the groups:
“petition the Bureau, with respect to protecting consumers and advancing the public interest, to promptly issue a rule addressing the use of mandatory pre-dispute arbitration (or forced arbitration) provisions in contracts between regulated entities and consumers of financial products or services that would allow the consumer to make a meaningful choice on whether to use arbitration after a dispute arises.”
Arbitration and the CFPB have a rich history, which we review by borrowing liberally from our past coverage. Recall that Dodd-Frank section 1028 directs the CFPB to study the use of predispute arbitration agreements (“PDAA”) in contracts for consumer financial products and services, to later report to Congress, and to ban, limit or impose conditions on their use if such action: “is in the public interest and for the protection of consumers.” Alert readers may recall that the CFPB did indeed issue the required report to Congress and later promulgated a rule banning class action waivers. However, before it became effective, the Final Rule was retroactively nullified in November 2017, when President Trump signed into law H.J. Res. 111, a Joint Disapproval and Nullification Resolution (see SAA 2017-41). Congress had exercised its authority under the Congressional Review Act, (“CRA”), 5 USC §§ 801 et seq., which allows that body to legislatively nullify any regulation within 60 legislative/session days of its publication. Under the CRA, a substantially similar reg cannot be reintroduced without the express permission of Congress. We provided a full history in an October 2017 blog post, “Arb Rule, We Hardly Knew Ye.” CFPB Arbitration Rule Likely To Be No More (And Never Was).
Recent History: Rule Proposed on National Registry …
“to establish a public registry of supervised nonbanks’ terms and conditions in ‘take it or leave it’ form contracts that claim to waive or limit consumer rights and protections, like bankruptcy rights, liability amounts, or complaint rights…. Under the proposed rule, nonbanks subject to the CFPB’s supervisory jurisdiction would need to submit information on terms and conditions in form contracts they use that seek to waive or limit individuals’ rights and other legal protections. That information would be posted in a registry that will be open to the public, including to other consumer financial protection enforcers.”
… And it Covers Mandatory Arbitration Agreements and Class Action Waivers
Any ambiguity about whether the proposed rule covered mandatory predispute arbitration agreements and class action waivers was resolved in the affirmative. Says the release:
“Under the proposal, the CFPB would seek information on contract terms and conditions seeking to waive any constitutional, statutory, or common law legal protection, right, or defense; restrict the ability of consumers to complain; limit the time or place for consumers to bring legal actions; limit liability amounts; waive class action rights; and impose arbitration provisions. Both company information and information about the use of the terms and conditions would be published” (emphasis added).
As reported in SAA 2023-13 (May 30), the House Financial Services Committee Subcommittee on Financial Institutions and Monetary Policy held a March 9 hearing, Consumer Financial Protection Bureau: Ripe for Reform. One of the topics discussed was the CFPB’s proposed new rule seeking information from nonbanks on, among other things, arbitration and class action waivers.
Drivers for the Proposed New Arbitration Rule
The Petition states that developments since 2017 demonstrate that a new rule is needed (ed: bullets from the table of contents are repeated verbatim): consumers’ lack of awareness and understanding of forced arbitration’s existence, meaning, and consequences; growth of additional constraints in forced arbitration provisions; changing terms to add forced arbitration after legal actions started in court; and use of credit monitoring contracts to end run federal regulations and impose forced arbitration clauses on Fair Credit Reporting Act claims.
Rule Would Pass CRA Muster, Advocates Say
The Petition addresses directly whether the proposed rule would run afoul of the CRA’s prohibition against promulgation of a rule in “substantially the same form” as a previously disapproved one (absent express permission from Congress):
“Here, the rule proposed by this petition would not be in ‘substantially the same form’ as the 2017 rule. The CFPB’s 2017 arbitration rule prohibited class action bans in arbitration clauses and required reporting of certain arbitral records. By contrast, the rule proposed in this petition would not prohibit, or even address, class-action bans. Rather, it would give consumers the right to make the choice about dispute resolution after a dispute arises, thereby ensuring that consumers can make informed, meaningful choices at the most relevant time. Importantly, the Bureau’s statutory authority to issue an arbitration rule remains unchanged.”
CFPB’s Initial Response
The Bureau responded almost immediately. As described in a September 18 Ballard Spahr blog post, CFPB Reacts Quickly and Favorably to Petition Submitted to it by Consumer Groups to Ban Pre-dispute Arbitration: “Evan Weinberger of Bloomberg received the following response from the CFPB in response to Evan’s request for comments on the filing of the Petition:
“Americans are overwhelmed by increasingly lengthy, complex, and one-sided fine print in form contracts. The CFPB is focused on companies that use fine print to extract extra money, lock people into unwanted business relationships, gain advantages they could not obtain in fair and competitive markets, or circumvent the rule of law. For example, in January the CFPB proposed to create a public registry of nonbank financial companies that purport to limit consumer rights or protections in form contracts, including arbitration clauses.
“We welcome participation in our rulemaking petition program, on the part of the consumer groups who filed this petition or any other members of the public. We are carefully considering the proposal relating to arbitration clauses, and will be opening a public docket and taking comment from the public on the proposal.”
The CFPB’s Website created petition docket No. CFPB-2023-00407-0001 here.
Comments were due by November 14. As of press time, there were just 32 comments, which broke along party lines. We excerpt below a few representative media posts:
Law Profs, Business Groups Spar Over Proposed Consumer Arbitration Ban, Reuters (Nov. 15): “If law professors’ signatures carried authoritative weight, the U.S. Consumer Financial Protection Bureau would already be drafting a new rule to prohibit the companies it regulates from requiring consumers to agree to arbitrate potential claims in advance of any actual dispute. Nearly 170 law professors signed a Nov. 14 letter urging the CFPB to act on a rulemaking petition submitted to the agency in September by nine consumer advocacy groups, including Public Citizen, Public Justice, the American Association for Justice and Better Markets.... Of course, as you know, federal agency rulemaking is not as simple as doing what law professors recommend. You will therefore not be surprised to hear that the U.S. Chamber of Commerce, several trade groups for industries regulated by the CFPB, and the Ballard Spahr lawyer who pioneered class action waivers in arbitration provisions all submitted comment letters on Tuesday that exhort the CFPB to reject the proposed prohibition on mandatory pre-dispute arbitration clauses.”
NAFCU, Trades Oppose Petition to Ban Arbitration, NAFCU Newsroom (Nov. 15): “NAFCU [National Association of Federal Credit Unions] joined with several other trade associations to voice opposition to a petition made to the CFPB that would require the bureau to pursue a rulemaking to ban pre-dispute arbitration provisions in contracts for consumer financial services…. The groups outlined several reasons for the bureau to deny the proposal, including:
- the 2017 Congressional Review Act (CRA) resolution that disapproved of the CFPB’s arbitration rule prevents the bureau from promulgating a rule that is ‘substantially the same’;
- the bureau does not have statutory authority to promulgate the petitioned rule without conducting a study and demonstrating that “any regulation that it proposes is ‘consistent with the study,’ in addition to demonstrating that the regulation is ‘in the public interest and for the protection of consumers’”; and
- the petition also contradicts the FAA and the Supreme Court’s recognition ‘that the FAA was designed to promote arbitration.’”
ABA, Trade Groups: CFPB has No Authority to Enact Rule Limiting Arbitration, ABA Banking Journal (Nov. 15): “The American Bankers Association this week, along with 13 other organizations, sent a joint letter to the CFPB urging the bureau to deny a recent petition for rulemaking to ban pre-dispute arbitration provisions in contracts for consumer financial services. Relying on protections enacted by Congress, ‘numerous businesses, including many companies that provide financial products or services, have for decades resolved consumer disputes by arbitration rather than through costly and burdensome litigation in our overburdened court system,’ the groups wrote, noting that arbitration reduces transaction costs and provides ‘fair and efficient’ dispute resolution.”
(ed: *We’re sure there is more to come on this proposal. Next is the Bureau’s response. We see a proposed rule coming. **As we said before, we agree that this proposed rule would seem not to be in “substantially the same form” as a previously disapproved one, but time will tell. ***It would appear that, as required by Dodd-Frank, the CFPB would be required to do a new study and report thereafter to Congress.)