WASHINGTON — The financial services industry is at risk of being caught flat-footed if a legislative measure to rescind the Consumer Financial Protection Bureau’s rule regulating arbitration agreements fails to pass.

The industry has been counting on a Republican-controlled Congress to strike down the CFPB’s rule using the Congressional Review Act, but as lawmakers recessed for an August break last week, the prospects for overturning the rule are uncertain. If lawmakers do not act, the rule is set to go into effect in mid-March.

Financial institutions aren’t ready yet, according to several industry observers.

“Financial institutions would be wise to start thinking about contingency plans and preparing for the possibility that the rule may not go away,” said Edmund Polubinski, a partner at Davis Polk. “The sand is running out of the hourglass, and a lot of work will need to happen if financial institutions end up having to comply with the rule in March.”

Sen. Lindsey Graham, R-S.C.
Sen. Lindsey Graham, R-S.C., is said to be a Republican vote against repealing the CFPB's mandatory arbitration rule. Bloomberg News

The rule, which would ban mandatory arbitration clauses from financial contracts, creates several compliance headaches for institutions. For one, those hopeful that Congress will strike it down must decide whether to keep using arbitration clauses in contracts given that they may not be able to enforce them for new customers, products or services if the rule goes into effect.

"They can debate whether to keep arbitration clauses, and they can discuss options under the rule with existing contracts and whether they will reissue arbitration clauses for existing customers," said Greg Cook, a partner at Balch & Bingham.

The rule applies only to new contracts for new customers, products or services. All other consumer contracts with mandatory arbitration agreements can stay in place.

But institutions must carefully track new or recurring contracts to ensure those customers are treated differently.

"If you amend your deposit agreement over the years, you may have a customer who started with you 20 years ago, so you need an audit trail to follow the amended agreements each time," Cook said.

Carrie Hunt, executive vice president of government affairs and general counsel for the National Association of Federally-Insured Credit Unions, said that “anytime you have a change in a rule like this, it requires a change in forms.”

Operationally, the changes can be challenging and many institutions will rely on vendors to print the new contracts, update websites and make sure that customer receive the updated contracts.

“Whether or not credit unions are going to be ready is a case-by-case situation,” Hunt said.

Institutions must also decide whether to continue to use arbitration agreements, since they could no longer get class-action waivers.

“I don’t think banks and companies are prepared at this juncture,” said Alan Kaplinsky, a partner at Ballard Spahr. “We have counseled our clients to prepare for the worst-case scenario of the compliance date happening on March 19 of next year.”

Kaplinsky said he believes institutions have the time to get ready, but clearly many are hoping they won’t have to be.

Senate Banking Committee Chairman Mike Crapo, R-Idaho, introduced a resolution to overturn the CFPB rule last month. The measure requires only a majority vote to pass, but it’s unclear if Republicans have enough support. They can afford to lose only two votes. Industry lobbyists already consider one Republican — Sen. Lindsey Graham of South Carolina — a lost cause. Other Republicans, including Sen. John Kennedy, R-La., appear reluctant to support overturning the CFPB measure.

The issue is compounded by the absence of Sen. John McCain, R-Ariz., who has returned home for treatment for his recently diagnosed brain cancer. It’s not clear when he will return to the Senate, but Republicans would likely need his vote.

The Congressional Review Act gives lawmakers 60 legislative days to act on the rule, which was finalized on July 19. It’s not exactly clear when those days will end — it might theoretically be as late as December — but Republicans are also competing with other priorities, many of which are urgent, including dealing with the debt ceiling and passing a budget.

Some industry representatives said banks, credit unions and others will still have an opportunity to fall in line by the time the status of the rule is known.

“There should be enough time to integrate the rule's requirements into compliance systems, such as by revising consumer contracts, once we know whether the rule will be taking effect,” said Lisa Ledbetter, a partner at Jones Day. “Right now, all eyes are on” the Congressional Review Act effort.

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