Not long after launching in 2011, the Consumer Financial Protection Bureau turned its gaze to the fine print of companies' contracts with customers — namely, the arbitration clauses that force disputes out of court.
The bureau conducted what many consider the most comprehensive study of arbitration ever done, concluding that the contract terms make it "nearly impossible for people to take companies to court when things go wrong," as CFPB Director Richard Cordray said. In July 2017, the CFPB finalized a rule banning arbitration agreements that prevent consumers from filing class actions.
But it has done so at a perilous time. Emboldened by the election of President Donald Trump, Republican lawmakers have employed the Congressional Review Act more than a dozen times this year to reverse regulations finalized in the waning days of the Obama administration. Their latest target is the arbitration rule. The House quickly voted to undo the rule. The regulation’s fate is now in the hands of the Senate, which could vote as early as this week to follow suit, Politico reported Monday.
Meanwhile, the agency is facing constitutional challenges to its independent, single director structure. And Cordray, as of early September, was rumored to be nearing a run for governor in his home state of Ohio.
On Sept. 8, The National Law Journal brought together Mayer Brown partner Andy Pincus and Gupta Wessler appellate lawyer Deepak Gupta, to discuss the CFPB's arbitration rule. The two argued against each other in AT&T v. Concepcion, the case in which the U.S. Supreme Court ruled that arbitration agreements were enforceable. Since that decision, in which Pincus prevailed for AT&T, arbitration agreements have proliferated. The discussion was edited for length and clarity.
The National Law Journal: Many suspect the arbitration rule will be challenged in court. But first it has to survive a Congressional Review Act challenge in the Senate. Any predictions?
Deepak Gupta: Before the rule came out, I was quite wary because I thought there was just an incredible danger to putting this rule out, having this CRAed — CRA has become a verb — and then binding a future agency because of the provision that says that the agency can't do substantially the same thing, so even in a sympathetic administration the agency's hands would be tied. That was predicated on the assumption that we wouldn't have the votes in the Senate, but I think I was wrong about that.
Andy Pincus: Most votes on controversial issues are tight in the Senate. So I don't think anyone ever thought this would be anything other than a hard fought battle, which it is. The folks [who] think that the CFPB went way too far feel that their arguments are convincing senators.
And I think they've found some receptivity not just in Republican offices but also in some Democratic senators' offices as well. But I think they feel pretty confident that, when the vote is called, the rule will be set aside, because there are two things going on here: One is the substance of the arbitration rule. But the other is there are real fundamental questions about the structure of the CFPB that are [highlighted] by what's been done here.
This is the only example of a significant rule being issued by any agency, including all of the independent agencies, after Inauguration Day. And I think it really puts in strong relief the significant constitutional questions about an agency that is so insulated from both the Congress and the president.
NLJ: Who is subjected to this rule?
Pincus: One of the misconceptions about the bureau is that it only regulates banks or bank-like entities. That's not at all true. Its regulatory authority is vast and is keyed to activities, not to kinds of entities, although there are some very complicated exceptions. So this is an extremely broad rule, just like the bureau's power is extremely broad.
Gupta: Andy is right that this is a significant rule with a wide sweep. It covers not just bank credit cards and mortgages but student loans and credit reporting. There are a lot of kinds of products and services that are appropriately under the bureau's jurisdiction, and they're going to be addressed by this rule. I also think the impact may be broader than that because this is a rule that has high public visibility and [brings] public attention to this issue.
Pincus: We should be transparent about what the interest groups are here. Yes, there are business interest groups, but there are also very well-organized and politically powerful interests in the legal community that want to have cases in court because that's their business. I think we have to recognize that the court system doesn't do a very good job of getting justice to people both on their individual clams and even on claims that are susceptible to class actions. Class actions have significant problems, and impose a lot of costs.
NLJ: Jumping past Congress to any court challenge, what are the defenses and vulnerabilities of this rule?
Pincus: It seems to me the challenges come in two buckets: One is the constitutional question. Obviously the rule is invalid if the bureau's structure is invalid. And then you have the other challenges under the Administrative Procedure Act, and I think it's no surprise given the comments that have been filed that there are significant concerns with the process the bureau followed.
Gupta: Andy has raised this constitutional question about the bureau's structure. I think it's possible that will get wrapped up into this fight. Setting that aside, I think a lot of people who haven't been following the CFPB rule that closely have this sense that what the bureau has done is out of step with the Supreme Court's arbitration jurisprudence and the thrust of what's been happening with the [Federal Arbitration Act]. But that overlooks the fact that the Dodd-Frank Act specifically delegated this authority to the bureau. And so the arguments come down to really these kind of more standard APA arguments about process and about the quality of the agency's decision-making. And the problem for the challengers is this study. The data reveals that the arguments that have been made about arbitration — that it's a better, faster, cheaper way of channeling these consumers' disputes — no longer hold water.
NLJ: Opponents of the CFPB's rule say it will effectively do away with a more convenient and efficient dispute resolution system for consumers because companies won't continue supporting arbitration programs. What does a world with the arbitration rule look like?
Pincus: An arbitration system puts a lot of costs on companies for every claim filed and a lot of internal costs. Companies say we're not going to absorb those costs if we're going to have to put aside money for the huge litigation cost associated with class actions. They're going to make a rational economic choice.
Gupta: First of all, it is a big "if." A lot has to happen for us to get to that point. I think we know what the world [would look] like to some extent. We go back to before AT&T v. Concepcion, before the prevalence of these kinds of arbitration clauses. Consumers are going to be able to get into court and bring class actions. … I don't shed many tears over the loss of individual arbitration in the consumer financial services space.
Reprinted with permission from the September 22, 2017 edition of The National Law Journal © 2017 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.