In connection with the petition to ban pre-dispute consumer arbitration agreements pending before the Consumer Financial Protection Bureau (CFPB) and a recent Senate Judiciary Committee hearing on “forced arbitration,” Congressman Andy Barr (R-Ky.) and Senator Thom Tillis (R-N.C.) and the American Financial Services Association (AFSA) have voiced their strong opposition to further regulation of consumer arbitration. 

In an April 12, 2024 letter to CFPB Director Rohit Chopra, Representative Barr (Chairman of the House Financial Services Subcommittee on Financial Institutions and Monetary Policy) and Senator Tillis (member of the Senate Banking Committee) urge the agency to deny the proposed rulemaking petition because it “would represent a significant abuse of the CFPB’s power and rulemaking process” and would violate the Congressional Review Act (CRA).  The letter explains:

Congress clearly restricted the CFPB’s authority to limit use of arbitration when it rejected the agency’s prior anti-arbitration rule under the  … CRA) …. [T]he CRA provides that a rule may not be issued in “substantially the same form” as the disapproved rule unless specifically authorized by a subsequent law. The CRA invalidated the CFPB’s prior anti-arbitration rule and the proposed rulemaking in the petition falls squarely within that prohibition.

Congress overturned the prior CFPB rule because it would have effectively invalidated virtually every existing pre-dispute arbitration agreement and because it failed to adequately consider the lack of relief that class actions provide to consumers when compared to far better outcomes provided by arbitration. The rule accomplished that result by targeting arbitration agreements providing for individualized decision-making and prohibiting class proceedings ….

The new rulemaking in the petition proposal would accomplish that very same result directly by invalidating all pre-dispute arbitration agreements in substantially the same form as in the prior rule that the CRA invalidated ….

Instituting a proceeding to adopt such a rule would be an affront to Congress, and a clear violation of the CRA, and a blatant disregard of fundamental separation-of-powers principles.

We wholeheartedly agree.  In fact, as discussed in the comments we submitted to the CFPB last November and our subsequent podcast we argued that the proposed rulemaking is “prohibited by law” because it would violate the CRA:

[T]he earlier rule and the rule advocated by petitioners have the exact same goal: the elimination of consumer arbitration agreements containing class action waivers—even though the CFPB itself has acknowledged that individualized arbitration is faster, cheaper and more beneficial to consumers than class action litigation—so that thousands of new class actions can be filed.  That would benefit only the lawyers for the class, not the consumer class members that the CFPB is statutorily charged with protecting, would burden companies with billions of dollars in additional litigation costs and would clog the courts. 

The Barr-Tillis letter further argues that, in addition to the CRA prohibition, the CFPB should deny the petition because the proposed rule would violate Section 1028 of the Dodd-Frank Act and would constitute “arbitrary, capricious, and irrational agency action” in contravention of the Administrative Procedure Act.  With respect to Section 1028, the letter asserts:

Section 1028 … requires the CFPB to conduct a study before attempting to regulate pre-dispute arbitration, and the CFPB must demonstrate that any regulation that it proposes is both “consistent with the study” and “in the public interest and for the protection of consumers.” 

The petition proposes that the CFPB knowingly skip Dodd-Frank’s study requirement and rely on the CFPB’s prior study from 2015 (which itself is based on data that is now more than a decade old). This violates the limitations and clear direction Congress placed on the CFPB through Section 1028, which requires the CFPB to regulate based on current facts and data.

The Barr-Tillis letter also opposes the CFPB’s proposed rule that would require companies to register if they use certain terms or conditions in form contracts such as waivers of consumer rights and arbitration provisions, regardless of whether such terms or conditions are lawful, on the ground that it would “subvert past Congressional action and intent.”  We also analyzed that proposed rule in detail in our webinar and podcast presentations.

In a separate development, AFSA submitted a letter to the Senate Judiciary Committee in advance of its April 9, 2024 hearing on “forced arbitration”  asking the Committee “not to impose restrictions or limits on permissible arbitration which reduces transaction costs and enables fair, speedy, and efficient dispute resolution.”  As emphasized in the letter:

Usage of pre-dispute arbitration clauses in contracts benefits both consumers and businesses.  Furthermore, courts work to ensure that arbitration agreements of all types are fair and do not provide an untoward advantage to any party.  Studies have long shown that consumers prevail more often, recover more money, and resolve their claims more quickly in arbitration than in litigation.

The only clear beneficiaries of broadly eliminating cost-effective and fair arbitration as a viable way to resolve disputes are class action lawyers, who would directly benefit from increased class action litigation.  The [CFPB] itself reported that class action settlements frequently provide, at best, a very low return to class members while class action attorneys take in millions of dollars.  Their gain would come at the expense of consumers, many of whom are not even eligible to participate in class action litigation.

AFSA’s arguments are indisputably well taken.  As we have previously observed:

The CFPB’s 2015 study [of consumer arbitration] confirmed that arbitration is a faster, less expensive and far more effective way for consumers to resolve disputes with companies than class action litigation.  It showed that consumers who prevailed in an individual arbitration recovered an average of $5,389.  By contrast, the average class action settlement for consumers who received cash payments was only $32.35, and those consumers often had to wait as long as two years to receive that paltry sum.  Class counsel, however, recovered a staggering $424,495,451 in attorneys’ fees.

We will continue to keep you updated.