The stunning defeat of the Consumer Financial Protection Bureau’s arbitration rule didn’t have to happen.
That was the message from critics and former agency officials who say the bureau erred in how it designed the final rule, putting too much emphasis on class action litigation as a panacea for consumers.
Had the agency tempered the rule instead of banning all mandatory arbitration clauses in financial contracts, it could have avoided having it repealed by Congress.
"In an era in which the GOP runs both Congress and the White House, how could the CFPB not have seen the benefit of a more pragmatic approach that would have benefited consumers, and not just plaintiffs' lawyers?" said Richard Gottlieb, a partner at Manatt, Phelps & Phillips. "The CFPB arbitration rule demonstrates blind support for the failed class action device as an engine for change."
Jenny Lee, a partner at Dorsey & Whitney and a former CFPB enforcement attorney, said the repeal was a "huge lesson in lost opportunity."
The CFPB’s loss has big consequences for the agency—under the Congressional Review Act, it is prevented from adopting a future rule that is "substantially similar."
Critics of the arbitration rule have long argued that the CFPB failed to take into account its own study, and other evidence that found class action lawsuits do not provide consumers with many benefits. The findings of the CFPB’s study furthered the impression that it was intent on doing something despite its own deeper look at the issue.
“We knew how the book was going to end,” said Richard Hunt, president of the Consumer Bankers Association. “We knew the CFPB was going to conduct a bad study to write a bad rule to pay off the trial lawyers ... [but] certainly the study helped our cause when it clearly states the consumer receives more money via arbitration than class action lawsuits.”
The industry repeatedly cited the CFPB's own study as a reason why the rule should be repealed because it found that consumers received just $32 on average from class action lawsuits, but $5,400 on average from a handful of disputes in arbitration.
After the findings of the study, some said CFPB Director Richard Cordray should have narrowed the scope of the rule or at the very least delayed it until a Democratic administration for fear the Senate would scrap it.
"It was a very calculated political gamble by the CFPB to adopt a rule at a time when it believed the Hill was in so much turmoil that the rule could withstand a [Congressional Review Act] repeal," said Quyen Truong, a partner at Stroock & Stroock & Lavan and a former CFPB assistant director and deputy general counsel.
"If the CFPB had conducted additional studies or drawn the rule more narrowly, the threat of a CRA vote would have been lessened," added Truong. "There might have been stronger grounds to support the rule and the political opposition would not have been so strong."
Indeed, the sheer closeness of the vote—the Senate passed the repeal measure 51 to 50 after Vice President Mike Pence cast a tiebreaking vote—shows that if just one more GOP senator had viewed the rule as acceptable, the Congressional Review Act effort would have failed.
Some said Cordray's political miscalculation now has substantially crippled the CFPB's ability to help consumers in the future without congressional action.
"They should have tempered the rule," Gottlieb said. "If they had promulgated a narrower rule that merely forced disclosure of arbitration subjects and results, that would have been viewed as a victory for industry and likely would not have drummed up sufficient congressional support for an override."
Quote"It was a very calculated political gamble by the CFPB."
Arbitration has been a polarizing issue since 2011, when the Supreme Court, by a 5-4 margin, ruled in the case of AT&T Mobility v.Concepcion that allowed for businesses to use so-called "class action waivers" that require consumers arbitrate claims rather than file class actions.
The CFPB was authorized under the Dodd-Frank Act to look at the issue of consumer harm from arbitration practices, including whether class action waivers essentially force consumers into arbitration.
The CFPB could have scaled back the arbitration rule by focusing solely on bringing transparency to the individual arbitration process. Such a version could have focused on transparency, allowing greater monitoring of arbitration decisions to make the filings more beneficial to consumers and their advocates.
"Instead of targeting practices that harm consumers, or working to make class actions more beneficial to consumers, the CFPB overreached by using the Dodd-Frank legislation to effectively ban class action waivers outright," Gottlieb said. "From an industry perspective, this smacked of bias for a plaintiffs’ bar that has done few favors for the consumers the CFPB was created to protect."
The CFPB rule also had planned to publish such claims, which could have led to more enforcement actions.
There were other options, observers said. The agency also could have required that all arbitration provisions have consumer-friendly features.
For example, AT&T used an arbitration clause that requires the company to pay all arbitration fees and provides consumers who win more in arbitration than the company offered them in a settlement to receive a bonus incentive payment of $10,000 and double their attorney's fees.
The bureau could also have required that all arbitration provisions give consumers an opportunity to "opt out" of arbitration, or to permit coordination among individual claimants.
Additionally, the CFPB had a different opportunity if it wanted to finalize the arbitration rule as written—it could have finished it earlier. The agency waited until July of this year to finish the rule, well after the GOP controlled the White House and Congress. Had it acted a year earlier, President Obama could have vetoed a repeal measure, which must be passed within 60 legislative days of notification of Congress.
Even industry representatives were shocked.
“Our biggest surprise is how long it took them to give a big wet kiss to the trial lawyers,” said Hunt.
In the end, few lawmakers were swayed by the argument that consumers could potentially receive monetary relief when they sue in a class.
"Anyone who gets one of those checks for $1.97 announcing your cut of a class action victory knows how futile a class action lawsuit can be for remedying past grievances," said Lee, the former CFPB enforcement attorney. "In fact, class action matters can be nominal in terms of providing people monetary relief, as compared to, say, CFPB refund checks from restitution in CFPB enforcement matters."