Congress Rejects CFPB Regulation Restricting Arbitration Clauses in Consumer Contracts
On October 24, 2017, the Senate voted 51-50 to nullify a Consumer Financial Protection Bureau (CFPB) regulation that restricted banks and credit card companies from requiring customers to submit to mandatory arbitration in the event of a dispute. Vice President Mike Pence provided the tiebreaking vote. The Senate’s resolution now goes to President Trump, who is expected to sign the resolution into law.
The rule, which was introduced by the CFPB in July but had not yet taken effect, would have restricted financial institutions from including mandatory arbitration clauses in the fine print of its consumer contracts. This restriction on arbitration agreements would have enabled aggrieved consumers to bring class-action lawsuits against financial institutions with increased ease. Mandatory arbitration clauses are commonly utilized in many types of consumer contracts across the financial industry, including credit card agreements and private student loans. As a result of the Senate’s vote, financial institutions will face fewer class-action suits from its consumers.
Congressional critics of the CFPB rule argued that arbitration provides a more cost-effective means of resolving disputes between consumers and banks. Representatives of the financial industry argued that mandatory arbitration benefits both consumers and financial institutions, because class-action lawsuits are expensive, time-consuming, and ineffective in protecting the rights of consumers. Supporters of the CFPB rule disagreed, arguing that the CFPB regulation imposed increased accountability on financial institutions. Following the Senate’s resolution, the White House issued a statement applauding the repeal of the rule.
Congress’s power to reject this rule stems from the Congressional Review Act, which enables Congress to review and overrule federal regulations issued by government agencies within 60 legislative days of the introduction of the rule. Prior to 2017, the Congressional Review Act had only been successfully invoked to overturn a rule once, in 2001. However, since President Trump has taken office, Congress has utilized the Congressional Review Act to nullify fourteen Obama-era regulations. Until Tuesday’s vote, the Senate’s efforts to repeal Obama-era regulations had largely focused on lower-profile financial rules, such as a Labor Department regulation encouraging states and citizens to create retirement savings accounts for private sector employees.
The Senate’s resolution is seen as a continuing effort to peel back post-crisis financial regulations from the Obama era, and foreshadows significant changes to the CFPB in coming months. The current director of the CFPB, Richard Cordray, vocally opposed the Senate’s decision to repeal the CFPB arbitration regulation. Cordray was installed as the first Director of the CFPB by President Obama in 2012, amidst protest from Senate Republicans. Cordray’s appointment expires in July 2018.
Congress’s rejection of the CFPB regulation complements the Supreme Court’s continuing trend of enforcing arbitration clauses as written in business and consumer contracts. Over the past decade, the Supreme Court has issued many pro-business rulings upholding the enforceability and validity of arbitration agreements, including upholding arbitration agreements even when the underlying contract mandating arbitration was found to be invalid. In reinforcing the validity of arbitration agreements, the Supreme Court has iterated that the Federal Arbitration Act declares a “national policy favoring arbitration.”
Without this CFPB regulation in effect, consumers will be required to submit to mandatory arbitration proceedings, and will continue to face difficulty in bringing class-action suits against financial institutions.