With the ink barely dry on the Consumer Financial Protection Bureau's final arbitration rule Monday, defenders and critics of the rule were already girding for a congressional fight over its ultimate fate.
The rule, which is meant to allow consumers to more easily form or join class action lawsuits, is widely unpopular among banks and congressional Republicans, who have vowed to repeal it through the Congressional Review Act. The law allows lawmakers to review and overrule regulations within 60 legislative days by a simple majority.
“I believe it will be all hands on deck to do a [CRA resolution] on this rule,” said Richard Hunt, president and CEO of the Consumer Bankers Association.
House Financial Services Committee Chairman Rep. Jeb Hensarling, R-Texas, quickly threw his support behind a rollback of the rule. “As a matter of principle, policy, and process, this anti-consumer rule should be thoroughly rejected by Congress under the Congressional Review Act,” said Hensarling.
The rule would restore consumers' rights to band together in class-action lawsuits against financial firms, and could potentially cost the industry billions of dollars. Under the rule, thousands of companies that lend or move money, from credit card companies to payment processors, would be restricted from using so-called arbitration clauses to stop consumers from banding together to sue.
The CFPB's director, Richard Cordray, said he expected a fight over the rule. Such a congressional challenge would play out with the CFPB already politically isolated — targeted by a GOP Congress that opposed its creation and a new Republican administration. Speculation has been brewing for months that the White House may attempt steps to remove Cordray. The CFPB director, meanwhile, is said to be considering a run for governor in Ohio.
Acting Comptroller of the Currency Keith Noreika also sent a letter to Cordray earlier in the day raising questions about the rule's impact on financial stability. He requested that the CFPB share the data it used in a study to develop the rule. “The increased cost associated with litigation and the loss of arbitration as a viable alternative dispute resolution mechanism could adversely affect reserves, capital, liquidity, and reputations of banks and thrifts, particularly community and midsize institutions,” the letter said.
In an emailed statement, Sen. Pat Toomey, R-Pa., who previously had sought to use the CRA for other rules, said he "will explore options to stop this rule, including using the Congressional Review Act."
"Today’s ill-conceived CFPB rule is yet another government-sponsored bonanza for trial lawyers at the expense of consumers seeking a speedy and fair resolution of their disputes," he said.
The arbitration rule could face other headwinds. The U.S. Chamber of Commerce has vowed to sue the bureau once the arbitration rule becomes final, or 241 days after it is published in the Federal Register.
"There is still a lot that could happen to derail this rule so that it never becomes effective," said Alan Kaplinsky, a lawyer at Ballard Spahr, who helped pioneer the use of arbitration clauses. "If it doesn't getting overridden" by the Congressional Review Act, "there will be a legal challenge, and there will be a new director, who could take steps to prevent the rule from ever becoming effective."
But Eric Goldberg, a CFPB senior counsel, said the CFPB consulted with the Treasury Department and other prudential regulators before issuing the rule.
And Cordray was defiant Monday, chiding the industry for sidestepping congressional intent in restricting arbitration.
"I am, of course, aware of those parties who have indicated they will seek to have the Congress nullify this new rule," Cordray said in prepared remarks. "That is a process that I expect will be considered and determined on the merits. My obligation as the director of the consumer bureau is to act for the protection of consumers and in the public interest. In deciding to issue this rule, that is what I believe I have done."
Cordray also cited Wells Fargo and its phony-accounts scandal as an example of a company that compelled its customers into arbitration even on accounts they never authorized. On Sunday, Wells got approval to settle 11 pending class actions for $142 million.
"Consumers should be able to stand up for themselves and pursue their own legal rights without having to wait on the government," Cordray said. "The government has limited resources and authority to respond to every problem that arises in these financial markets."
Meanwhile, some observers speculated about the timing of the final rule, suggesting that the agency tried to hurry the regulation with Cordray's status at the agency somewhat uncertain.
Hunt speculated that Cordray decided to move forward with the final rule because his term ends in July 2018.
Cordray “couldn’t just keep it forever, because his days are numbered,” Hunt SAID.
The exact specifications of a CRA fight over the arbitration were still unclear Monday, but Hunt said GOP lawmakers might be more aggressive about upending the arbitration rule than with other regulations they have attempted to overrule with their review authority.
The CRA has also been credited for delaying CFPB regulations on prepaid debit cards. However, a resolution to reject that rule didn’t garner enough support to pass. “That was what I would call single-A baseball,” Hunt said of the prepaid card rule. “This is Major League baseball.”
Democratic supporters of the CFPB were also positioning for a fight after the rule was released.
Sen. Elizabeth Warren, D-Mass., issued a statement that summed up the strategy of the Democrats.
"In the upcoming months, the U.S. Chamber of Commerce and other big business lobbying groups will go all out to get Republicans in Congress to reverse this rule," Sen. Elizabeth Warren, D-Mass., said in a statement. "So Republicans will have to decide whether to defend the interests of their constituents or shield a handful of wealthy donors from accountability."
Consumer advocates made clear they plan to use Wells as an example in defending the final rule.
"Forced arbitration is simply a license to steal when a company like Wells Fargo commits fraud through millions of fake accounts and then tells customers: 'Too bad, you can't go to court,' " said Lauren Saunders, an associate director of the National Consumer Law Center.
The CFPB's final rule Monday some minor changes from the proposed rule the agency issued in May 2016.
The bureau gave several exemptions to employers that offer consumer financial products or services for employees as an employee benefit; to entities regulated by the Securities and Exchange Commission or the Commodity Futures Trading Commission, which have their own arbitration rules; to broker-dealers and investment advisers overseen by state regulators; and to state and tribal governments that have sovereign immunity from private lawsuits.
The final rule prohibits credit card companies, banks, student lenders, payday lenders, debt collectors, credit reporting companies and other financial companies from using forced arbitration clauses that ban consumers from participating in class actions.
Arbitration contracts would not be banned outright, but any new contracts would have to explicitly say that consumers cannot be banned from participating in lawsuits. The rule includes specific language that companies would have to use in their contracts.
Industry representatives have said that the CFPB's arbitration rule would essentially force them to stop using arbitration altogether because of the cost of litigating class actions.
The CFPB plans to oversee and monitor the arbitration process, including collecting certain records from companies on nonpayment of arbitration fees and other matters.
Congress prohibited arbitration agreements in the residential mortgage market. The Military Lending Act also prohibits such agreements in many forms of credit extended to service members and their families, the CFPB said.
Currently, 53,000 financial services companies use arbitration agreements. Industry estimates have projected that a spike in class actions over the next five years resulting from the rule will cost as much as $5.2 billion to defend.