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Update - Senate Unwinds CFPB Arbitration Rule

ABSTRACT: Following the issuance of the CFPB's Rule prohibiting arbitration clauses for waiver of consumer class action rights, the U.S. Senate wasted no time in passing legislation to overturn the CFPB rule. The law passed by the Senate restores law regarding arbitration provisions to the status quo.

It ended before it ever began. As reported in a prior post, in July of 2017, the Consumer Financial Protection Bureau (the “CFPB”) enacted a new rule that would have prohibited financial institutions from including arbitration provisions in their contracts with customers wherein the customers waived their right to bring class action litigation against the creditor.   The new rule was set to take effect in early 2018.

Not under our watch, said the United States Senate.  Promptly following the CFPB’s issuance of the new arbitration rule, Sen. Mike Crapo of Indiana introduced S.J.Res.47, “Providing for congressional disapproval under chapter 8 of title 5, United States Code, of the rule submitted by Bureau of Consumer Financial Protection relating to “Arbitration Agreements.”  The resolution required only a simple majority vote to be enacted into law.  Indeed, the resolution came down to a 51-50 vote, with Vice President Mike Pence breaking the tie.

The CFPB rule was designed with the intention of protecting consumers from an unknowing waiver of their right to pursue legal remedies, such as class action litigation.  Research revealed that 3 out of 4 consumers who had entered into such arbitration clauses in their loan agreements were not aware they had done so.

Critics of the arbitration rule have maintained that the rule is a violation of individuals’ freedom to contract – after all, the consumer arguably could choose not to do business with that lender if unhappy with the terms of the agreement. Furthermore, many observed that the only parties who stood to benefit from the prohibition of class action waivers are the plaintiff’s attorneys representing consumers, and not the consumers themselves, since individual payouts from class litigation are often nominal.

Responding to the Senate’s vote to overturn the arbitration rule, CFPB Director Richard Cordray called the decision a “giant setback for every consumer in this country” and predicted that financial institutions would now “remain free to break the law without fear of legal blowback from their customers.”

Conversely, the Trump Administration commended the result of the Senate’s Vote, in a statement released shortly thereafter:  "By repealing this rule, Congress is standing up for everyday consumers and community banks and credit unions, instead of the trial lawyers, who would have benefited the most from the CFPB’s uninformed and ineffective policy.”

So, while these consumer credit arbitration clauses will likely remain a controversial topic for years to come, the rule intended to get rid of them has instead been extinguished.