May 20, 2022

CFPB Arbitration Study Would Not Support a New Regulation

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Key Takeaways

  • The findings regarding class actions versus individual arbitration are essentially irrelevant since the CFPB cannot ban class action waivers again.

Recently, Professor Jeff Sovern and I exchanged views on whether the CFPB could (or should) add arbitration rulemaking to its regulatory agenda.  Professor Sovern has now suggested that the CFPB's 2015 Study of consumer arbitration would support a new regulation.  It would not.

The CFPB's earlier final arbitration rule was overridden by the Congress under the Congressional Review Act (CRA).  The CRA provides that a rule subject to an enacted joint resolution of disapproval "may not be reissued in substantially the same form, and a new rule that is substantially the same … may not be issued, unless the reissued or new rule is specifically authorized by a law enacted after the date of the joint resolution."  As the CFPB acknowledged in its summary of the final arbitration rule, the rule was inextricably intertwined with the Study:

Congress directed the Bureau to study these pre-dispute arbitration agreements in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank or Dodd-Frank Act).  In 2015, the Bureau published and delivered to Congress a study of arbitration (Study).  In the Dodd-Frank Act, Congress also authorized the Bureau, after completing the Study, to issue regulations restricting or prohibiting the use of arbitration agreements if the Bureau found that such rules would be in the public interest and for the protection of consumers.  Congress also required that the findings in any such rule be consistent with the Bureau's Study.  In accordance with this authority, the final rule issued today imposes two sets of limitations on the use of predispute arbitration agreements by covered providers of consumer financial products and services.

The final rule addressed both class and individual arbitration.  Again, quoting from the CFPB's summary of the final rule:

First, the final rule prohibits providers from using a pre-dispute arbitration agreement to block consumer class actions in court and requires most providers to insert language into their arbitration agreements reflecting this limitation.  This final rule is based on the Bureau's findings - which are consistent with the Study - that pre-dispute arbitration agreements are being widely used to prevent consumers from seeking relief from legal violations on a class basis, and that consumers rarely file individual lawsuits or arbitration cases to obtain such relief.

Second, the final rule requires providers that use pre-dispute arbitration agreements to submit certain records relating to arbitral and court proceedings to the Bureau.  The Bureau will use the information it collects to continue monitoring arbitral and court proceedings to determine whether there are developments that raise consumer protection concerns that may warrant further Bureau action.

Insofar as it addressed the use of class action waivers, the final rule was nullified by the CRA.  Since the CFPB is prohibited from reissuing a substantially similar new rule that would prohibit class action waivers, the vast majority of the Study would be of little use to the CFPB because it was devoted to comparing class action litigation to individual arbitration.  Moreover, insofar as it addressed individual arbitration, the portion of the final rule that would have required financial services providers to submit arbitration records to the agency was also nullified. 

Even more importantly, as a practical matter, the findings in the Study would not support a new rule regulating individual arbitration because the CFPB concluded that "the evidence before the Bureau, including the Study, was inconclusive as to the relative fairness and of individual arbitration compared to individual litigation."  (Final Rule, p. 342) (italics added).  That is why the CFPB tried to impose reporting requirements.  Since those requirements were repealed, no data has been collected, and the CFPB is back at square one. 

Under the Dodd-Frank Act, any new arbitration rule would have to be based on a finding that it was in the public interest and for the protection of consumers.  For the above reasons, the earlier Study would not provide support for such a rule.  The findings regarding class actions versus individual arbitration are essentially irrelevant since the CFPB cannot ban class action waivers again.  And, the findings regarding individual arbitration are unhelpful because the CFPB concluded they were "inconclusive."  Therefore, Professor Sovern is wrong in arguing that the CFPB could base a new arbitration regulation on the earlier Study.

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