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Senate Action Reverses CFPB Rule, Re-Opens Door to Arbitration Clauses

On October 23, 2017, the U.S. Senate voted by a narrow margin to repeal the Consumer Finance Protection Bureau’s (CFPB) July limit on arbitration clauses in consumer financial contracts. The repeal of the rule effectively limits the institution of class action lawsuits in consumer financial disputes and allows banks and other financial institutions to elect mandatory arbitration rather than litigation.

Effect of the CFPB arbitration rule

This past July, the CFPB instituted rule barring certain dispute resolution clauses in consumer financial contracts. The clauses at issue prevent consumers from joining together to file class-action lawsuits, and instead designate arbitration as the required dispute resolution procedure. In effect, then, the CFPB’s July rule rendered these clauses unenforceable and opened the door to consumer financial class action proceedings.

Senate reversal of CFPB arbitration rule

The Senate made use of the Congressional Review Act, which allows the Senate sixty working days to undo regulations by a vote. The CFPB arbitration rule was overturned by a vote of 51-50, with Vice President Pence casting the tie-breaker.

The reversal will allow financial institutions to include mandatory arbitration clauses in contracts and limit class action proceedings. Proponents of the CFPB argued that the Senate action is anti-consumer.  A Trump administration study released last month claims that the CFPB rule would have led to an additional 3,000 class action lawsuits over the next five years; about $500 million in legal fees for the financial institutions; more than $330 million in payments to plaintiffs’ lawyers; and $1.7 billion in additional settlements – with members of the class receiving no compensation in nearly 9 out of 10 class actions.

Why lenders favor arbitration

Arbitration is often favored in niche areas, from financial services to architecture. When the subject is technical or esoteric, arbitration allows the parties to choose fact-finders who have an understanding of the subject. This allows a decision on the merits rather than on emotion.

The costs of arbitration, in the long run, are also lower than litigation. Although initial filing fees of arbitration may be higher than the cost of filing a lawsuit, but the cost of arbitration does not accrue at the same rate as a lawsuit where costs tend to rise as the case moves through the legal process.

Consumer litigation defense attorneys

Rosenberg Martin Greenberg has long defended financial institutions against consumer claims both in arbitration proceedings and in class action lawsuits.  We have extensive experience with all Maryland state and federal consumer protection statutes. Put our long-standing presence and reputation in the field to work on your case. Call today to schedule a consultation with a member of our Financial Institutions Litigation Group.