A late Tuesday night U.S. Senate vote may have ended the suspense over the fate of the Consumer Financial Protection Bureau’s rule that would have made it easier for consumers to file class action lawsuits against banks and other financial firms, but it left open several questions about future regulation of arbitration clauses and payday loans. Vice President Mike Pence broke a Senate tie on a resolution brought under the Congressional Review Act that effectively kills the CFPB Arbitration Rule which prohibits the inclusion of class action bans in arbitration clauses, which advocates say would have allowed consumers to hold banks and other financial firms accountable for improper fees and other violations. President Donald Trump said he would sign the measure soon after it was passed.
While the vote put an end to the CFPB’s rule, the fight over arbitration may just be beginning, and consumer advocates appear confident that they will ultimately win out on the issue.
“People are outraged. At the end of the day, we’ve lost this battle, but we’ll win the war,” said Lauren Saunders of the National Consumer Law Center.
Below are four takeaways from the Senate vote to kill the arbitration rule:
CFPB, And Its Director, Got a Bloody Nose
Prior to the arbitration vote, the CFPB had managed to emerge from the first nine months of the Trump administration relatively unscathed. It had faced some defeats in court, but that happens when a regulator takes aggressive enforcement actions that test new legal theories.
But the bureau’s rule for the prepaid card market survived a brush with the CRA earlier this year. And, despite a widespread hope among Republican lawmakers and the financial services industry, Trump has not yet moved to fire CFPB Director Richard Cordray.
The bureau’s luck, however, changed Tuesday night by the slimmest of margins.
“This is a self-inflicted wound caused by overreach,” said Andrew Sandler, the chairman and executive partner of Buckley Sandler LLP.
The floor debate on the CRA measure included Senate Banking Committee Chairman Mike Crapo, R-Idaho, taking shots at the CFPB’s single-director structure and its actions, but the genteel chairman’s comments did not get personal about Cordray.
Yet after Cordray and the CFPB issued a blistering statement about the Senate vote, the tone from other members of that committee changed.
“The unelected Mr. Cordray issued yet another stupid regulation that would hurt consumers, the people’s democratically elected representatives voted to stop the regulation, and now Mr. Cordray whines that Congress stopped his stupid regulation. It’s well past time for Mr. Cordray to resign and begin his long-expected, losing campaign for governor of Ohio. If he won’t, President Trump should fire him,” Sen. Tom Cotton, R-Ark., said in a Wednesday statement.
Cordray is unlikely to leave the CFPB soon, and Trump may not get around to firing him. But the CFPB director’s term in office ends in July.
“Cordray failed to achieve what he wanted to be his crowning achievement of his tenure,” said Alan Kaplinsky, the co-head of Ballard Spahr LLP’s Consumer Financial Services Group.
CFPB Could Still Tackle Arbitration Clauses
Despite its rule on mandatory arbitration clauses getting scuttled, and the CRA’s provision that it cannot write a new rule that would do much of what the now-dead arbitration rule would have done, the CFPB is not entirely shut out from regulating arbitration clauses.
The bureau will just have to do it on more of a case-by-case basis using its existing enforcement and supervisory authority, Sandler said.
“The CFPB should have focused on ensuring that arbitration clauses provided fair opportunity for consumers to challenge lender decisions rather than seeking to end arbitration,” he said.
One thing that the CFPB can do is review individual arbitration clauses to make sure they are easy to invoke and inexpensive for consumers, and that the cases are overseen by truly independent arbitrators.
The CFPB can also review disclosures to ensure that they do not fall afoul of the bureau’s power to bring cases against shoddy arbitration clauses, Saunders added.
“In particular, unfair, deceptive or abusive practices could potentially be the subject of enforcement actions,” she said.
Where the bureau will be limited is in its ability to bring about a market-wide change to arbitration clauses, which means companies are going to have to make sure that their clauses meet existing standards, she said.
“They just can’t write another rule. I think that companies are likely looking at their contracts now to make sure were their arbitration provisions challenged they’re the best that they can be,” she said.
CFPB opponents will be on the lookout for any evidence that the bureau is looking to take an expansive action against arbitration clauses and put in a new rule through the back door after Congress and the president acted, however.
“Everybody would see that for what it is,” said Reed Smith LLP partner and former CFPB enforcement attorney Maria Earley.
Still, with the bureau so strongly focused on arbitration, it may not be willing to go quietly after its Tuesday defeat.
“If they think there is some credible way to get at it, I think they’ll try to do it,” Earley said.
Payday Lending Rule May Be Safe From the CRA
The CFPB in September released a rule regulating the payday loan industry. Although the rule has generated an outcry from the industry and complaints about the CFPB’s method for writing the rule, most observers do not think it will meet the same fate as the arbitration rule.
At least one Republican on the House Financial Services Committee has floated the idea of bringing a CRA resolution to eliminate the payday lending rule, and it might engender significant support in the House.
But the Senate is a different story, Kaplinsky said.
“It’s got to be considered a long shot, but not totally out of the question,” he said in a telephone call from Buenos Aires, Argentina.
Republicans, with a slim 52-48 majority in the Senate, can only afford to lose two votes in order for a CRA effort to fail. The payday lending rule does not engender the kind of industry-wide opposition that the arbitration rule did, easing the political pressure.
“Here you have one particular element of the financial services sector, whereas it seemed like the entire financial services industry was against the arbitration rule,” said Christine Hines of the National Association of Consumer Advocates.
In addition, 14 states and Washington, D.C., ban payday lending, including four states with two Republican senators and one, Pennsylvania, where one of its two senators is a member of the GOP. That means that those senators will not have to answer to local concerns.
All of that means consumer advocates are confident they can hold off a CRA challenge to the payday lending rule.
“We came really, really close on the arbitration rule even with the entire financial industry against and the power of the big banks,” Saunders said.
That doesn’t mean the rule will necessarily take effect. Payday lenders are likely to sue, and a new CFPB director could either attempt to pull the rule back or choose not to enforce it.
“I wouldn’t want to wager a lot of money on the small-dollar lending rule overcoming all the hurdles that remain,” Kaplinsky said.
Arbitration Fight Is Far From Over
The CFPB’s rule may be dead, but the fight over arbitration is not.
All of the Senate Democrats, including those from red states facing tough re-election fights, voted to keep the rule in place. A pair of unlikely Republicans — John Kennedy of Louisiana and Lindsey Graham of South Carolina — also sided with the CFPB.
Even before the vote, Democrats, including last year’s presidential nominee Hillary Clinton, have made limiting the use of arbitration clauses in financial contracts, employment contracts and other areas a key part of their platform.
It is also a key part of the Democrats’ new “Better Deal” platform.
So if and when Democrats take control of Congress and the White House, expect them to make a big, broad push against arbitration clauses.
“We’re not going to lose that momentum,” said Amanda Werner, the arbitration campaign manager for Public Citizen and Americans for Financial Reform.
Indeed, there is already a bill in the Senate, the Arbitration Fairness Act, introduced by Sen. Al Franken, D-Minn. That bill would take a much broader swipe at arbitration clauses, and activists will likely push for a bill like that to get passed.
“We would like to see more comprehensive reform,” Werner said.
Tuesday’s loss could be a springboard for further wins, given the surprising amount of publicity the fight over the CFPB rule got, Saunders said.
“We’ve been engaged in a long fight to take back our day in court, and we’re going to keep on fighting,” she said.
The above was reported by Law360.