CFPB's Arbitration, Payday Plans May Be Derailed, Gutted

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The Consumer Financial Protection Bureau's contentious rulemakings on arbitration and payday lending may be in jeopardy with the change in administrations and continued GOP control of Congress.

President-elect Donald Trump could conceivably take a personal interest in the agency's arbitration plan, given that he is due in court Nov. 28 to defend himself against allegations of fraud brought by students of now-defunct Trump University in a class-action suit.

"We do know that Donald Trump is no fan of class actions, since he has one going on right now," said Alan Kaplinsky, who leads the consumer financial services group at Ballard Spahr. "On the industry side, people are feeling very confident that the [arbitration] rule will not become effective."

Arbitration is arguably one of the bureau's most contentious rulemakings because it is expected to unleash a wave of class-action lawsuits against lenders, credit card companies and other financial firms. The CFPB's plan would allow consumers to ban together to sue financial companies, a switch from the current setup, under which disputes must be resolved through arbitration.

The proposal has been portrayed by as a money grab by the plaintiff's bar that would increase liability for 50,000 businesses, while consumer groups argue it's a much-needed reform that gives more power to borrowers.

The arbitration plan was already likely to face litigation prior to Trump's win. The U.S. Chamber of Commerce was widely expected to sue the agency, though that can only happen once a final rule comes out.

On Friday, Jim Nussle, the president and CEO of the Credit Union National Association, asked the CFPB to impose an immediate moratorium on all pending and future rulemakings.

"Policies coming out of Washington that limit consumers' ability to obtain safe credit, or make it difficult and more expensive to access products and services from their community financial institution such as their credit union, are not making their lives better," Nussle wrote in the letter.

But some said it's far too early to say that the CFPB's pending proposals are dead on arrival.

While Republicans want to roll back the Dodd-Frank Act, their majority in the Senate remains slim. Making sweeping changes or successfully getting a new CFPB director confirmed (assuming the current one is ousted or resigns) will not be an easy task.

"Some people have jumped to the conclusion that everything will change overnight," said Quyen Truong, a partner at Stroock & Stroock & Lavan, and a former CFPB assistant director and deputy general counsel. "The whole system is in place and it takes a lot of time to change things in Washington.

The CFPB is looking at all of its rulemakings to determine what the Congressional response could be, and how the timing of a potential replacement for CFPB Director Richard Cordray could affect the calculus, Truong said.

"All of those things are in the mix right now," she said, noting that the CFPB has not "set out a strategy."

"It is a possibility that there would be legislation subjected to specific areas like arbitration," Truong said.

The bureau could try to speed up the final arbitration and payday lending plans. But doing so would be difficult given the deluge of comment letters and the amount of work that still needs to be done on both proposals.

"The arbitration rule has to be softened as it will certainly be challenged if issued in its current form," said Craig Nazzaro, an attorney at Baker Donelson.

Nazzaro and others have claimed that the CFPB did not satisfy the legal standard in Dodd-Frank, which holds that the CFPB can only prohibit or limit arbitration if it is "in the public interest," and "for the protection of consumers."

The CFPB's payday lending plan is also potentially on the chopping block. Payday, installment and auto title lenders have been lobbying to change the plan, arguing that it would force lenders out of business and give consumers no alternatives for short-term, small-dollar loans.

"Strategically I think they will walk each proposal back to become more acceptable to the industry," Nazzaro said.

Kaplinsky said that Trump ironically did not have an arbitration provision in the contracts signed by Trump University students. That opened the door for the civil lawsuit being heard by U.S. District Court Judge Gonzalo Curiel.

Trump came under fire during the campaign by saying Judge Curiel should be removed from the court case because he is of Mexican descent and faced a conflict with Trump's pledge to build a wall between the United States and Mexico. On Friday, Curiel suggested that the two parties settle the litigation.

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Law and regulation Consumer banking Dodd-Frank Enforcement Payday lending