On April 7, 2017, the Rutgers Institute for Professional Education and Rutgers University Law Review will sponsor an all-day symposium entitled: “Resolving the Arbitration Dispute in Today’s Legal Landscape.” One of the four panels will be devoted to the CFPB’s arbitration rulemaking.

All four speakers on the CFPB panel are law professors.  Of those law professors, to my knowledge, only Professor Jeff Sovern of St. John’s University School of Law and Professor Myriam Gilles of Benjamin N. Cardozo School of Law have been involved in the CFPB rulemaking.  Professors Sovern and Gilles both support the CFPB’s proposed rule which would bar the use of class action waivers in arbitration provisions in consumer financial services contracts.  Based on the articles they have written, it appears at least one of the other panelists is a proponent of class actions who would not support the CFPB’s proposed rule.

Most significantly, there is no panelist who drafts or defends arbitration provisions for the consumer financial services industry.  There is also no one from the CFPB or the staff of a Congressional committee that will consider the important issue of whether Congress will use the Congressional Review Act to override any CFPB final arbitration rule.

On Monday, during “The CFPB Speaks” panel I moderated that was part of the Practicing Law Institute’s 22nd Annual Consumer Financial Services Institute in Manhattan, Diane Thompson, Deputy Assistant Director of the CFPB’s Office of Regulations, reported that the CFPB is still reviewing comment letters on its proposed arbitration rule (which would preclude the use of class action waivers) and gave no timetable as to when it will issue a final arbitration rule.

Yesterday, on another panel, “Hot-Button Consumer Financial Services Issues,” Deepak Gupta and Paul Bland debated whether Director Cordray should issue a final arbitration rule.  Currently in private practice, Deepak practiced law for several years at Public Citizen Litigation Group and the CFPB.  Paul is Executive Director of Public Justice.

Paul took the position that Director Cordray should issue a final rule because there is a reasonably good chance that there would be insufficient votes in the Senate to override it under the Congressional Review Act.  Paul indicated that polling and focus groups of consumers support the CFPB’s issuance of a rule.

Deepak observed that Director Cordray is in a tight spot since if he issues a final rule, there is a high risk that Congress will pass and President Trump will sign a resolution overriding the rule under the CRA.  He pointed out that Congress and President Trump have already utilized the CRA to override several regulations issued by other agencies.  Deepak noted that if the CRA were to be used to override a final arbitration rule, the CRA would prohibit the CFPB from promulgating a rule that is substantially the same at any time in the future.  Playing “devil’s advocate,” Deepak suggested that Director Cordray consider waiting to issue the rule at some time in the future when there is no risk of a CRA override.

On February 9, 2017, the House Judiciary Committee by a vote of 19-12 passed the Fairness in Class Action Litigation Act of 2017, a bill that would make significant changes to the procedures for class actions in federal court.  The bill’s passage by the House and Senate with strong Republican support would seem to augur well for the adoption of a joint resolution of disapproval under the Congressional Review Act to nullify a final arbitration rule should one be issued by the CFPB.

Intended to combat abuses in class action and mass tort litigation, the bill includes provisions that would:

  • Prohibit a court from certifying a class action seeking monetary relief for personal injury or economic loss unless “the party seeking to maintain such class action affirmatively demonstrates that each proposed class member suffered the same type and scope of injury as the named class representative or representatives.”
  • Prohibit a court from certifying a class action “in which any proposed class representative or named plaintiff is a relative of, is a present or former employee of, is a present or former client of (other than with respect to the class action), or has any contractual relationship with (other than with respect to the class action) class counsel.
  • Prohibit a court from certifying a class action seeking monetary relief unless the class is defined with reference to objective criteria and the party seeking to maintain the class action “affirmatively demonstrates that there is a reliable and administratively feasible mechanism (a) for the court to determine whether putative class members fall within the class definition and (b) for distributing directly to a substantial majority of class members any monetary relief secured for the class.”
  • Prohibit payment of attorneys’ fees in a class action seeking monetary relief until the distribution of monetary recovery to class members has been completed and limit the portion of an attorneys’ fee award to class counsel that is attributed to the monetary recovery to a reasonable percentage of any payments directly distributed to and received by class members, with the attorneys’ fee award in no event to exceed the total amount of money directly distributed to and received by class members.
  • Allow appeals to a circuit court from an order granting or denying class action certification under Rule 23 of the Federal Rules of Civil Procedure

A group of public interest and consumer advocacy groups have sent a letter to Representative Bob Goodlatte, Chairman of the House Judiciary Committee, and Representative John Conyers, Jr., the Ranking Member, expressing their strongly opposition to the bill.  In their letter, the groups reference the requirement that “each proposed class member suffered the same type and scope of injury as the named class representative or representatives” for a court to certify a class action and state that “[t]his alone would sound the death knell for most class actions.”

Director Cordray has sent a letter to Senator Jeff Flake responding to a series of questions posed by the Senator on the CFPB’s proposed arbitration rule.  The comment period on the proposed rule closed on August 22, 2016.  Senator Flake posed his questions on August 19, 2016, but Director Cordray did not respond until January 30, 2017.  Senator Flake had prefaced his questions with the following pointed criticism of the proposed arbitration rule:

Since Congress passed the Federal Arbitration Act in 1925, federal law has protected the use of arbitration as a means to resolve private disputes.  As an alternative to expensive litigation, millions of Americans have since enjoyed the faster resolution time associated with arbitration.  Arbitration is also less costly than litigation for consumers because most arbitrators are limited in the fees they can charge for their services.  The use of class-action waivers, which the Supreme Court ratified as recently as 2011, allows financial institutions and consumers to resolve their disputes in arbitration rather than entering into costly class litigation.  Eliminating the availability of these waivers, as the Bureau proposes to do, would put financial institutions and their customers at the mercy of those looking to initiate lengthy court proceedings that yield little benefit to either the consumers or the institutions.As you know, Section 1028 of the Dodd-Frank law required the Bureau to conduct a study on arbitration and authorized the Bureau to issue a regulation to “prohibit or impose limitations” on arbitration agreements.  However, under current statute, such regulations are permissible only if the study finds that they are “in the public interest and for the protection of consumers.”  Upon reviewing the study, I have concerns about the extent to which it justifies the Notice of Proposed Rulemaking.  First and foremost, the benefit of class settlements to consumers is very much an open question, yet the Bureau appears to have chosen a side while failing to fully consider the ramifications and effect on protections afforded consumers.  For example, the study did not investigate whether class counsel act in good faith as agents of class litigants.

Among the questions asked by Senator Flake was a question asking about the effect of the CFPB’s enforcement power on the net benefit of class actions and another asking whether, given that attorney’s fees typically comprise a substantial portion of the aggregate payments made in class action settlements, the CFPB considered placing a limit on the percentage of fees an attorney can seek in a lawsuit or had a view as to what would be a reasonable range of attorney’s fees by percentage of payments made in a settlement.  Despite the CFPB’s recovery of more than $11 billion for consumers through enforcement actions and over $300 million in supervisory actions, Director Cordray stated that “public enforcement is not itself a sufficient means to enforce consumer protection laws and consumer finance contracts.”  With regard to attorneys’ fees, Director Cordray referenced the courts’ role in reviewing the reasonableness of attorney’s fees when approving class action settlements and indicated that the CFPB had not used data obtained in its arbitration study “to determine whether a certain percentage would be a reasonable amount to award to plaintiffs’ attorneys.”

Although there was speculation that the CFPB might finalize its arbitration rule by Inauguration Day, the CFPB has not yet issued a final rule.  A final rule will likely be challenged under the Congressional Review Act (CRA), a law enacted in 1996 that establishes a procedure by which Congress can nullify a covered rule adopted by a federal agency.  Last week, Senator David Perdue initiated the CRA nullification process with respect to the CFPB’s prepaid card rule.

The Cause of Action Institute has filed an action against the CFPB under the Freedom of Information Act (FOIA) seeking information related to the CFPB’s proposed arbitration rule.  In its complaint filed in D.C. federal district court, the Institute described itself as “a non-profit strategic oversight group committed to ensuring that government decision-making is open, honest, and fair.”

In April 2016, the Institute sent a FOIA request to the CFPB that included a request for “All records by or between CFPB employees regarding the Arbitration Study and/or the Proposed Ban.”  After consultation with the CFPB, the Institute filed a new FOIA request in June 2016 that included the same request but limited the request to records that contained certain search terms.

The CFPB thereafter issued a final determination indicating that it was producing certain pages of the responsive records in full or in part and was withholding the remaining pages in full.  In its determination, the CFPB specified the FOIA exemptions on which it was relying to withhold responsive records.  The CFPB denied the Institute’s appeal in full.

In the complaint, the Institute alleges that the CFPB violated FOIA by improperly applying the various FOIA exemptions on which it relied.

The comment period on the CFPB’s proposed arbitration rule closed on August 22, 2016 and we have heard rumors that the CFPB is pushing to issue a final rule before January 20.

The CFPB’s Fall 2016 rulemaking agenda has been published as part of the Fall 2016 Unified Agenda of Federal Regulatory and Deregulatory Actions.  The preamble indicates that the information in the agenda is current as of October 19, 2016.  Accordingly, given the results of the Presidential election, including its potential impact on the CFPB’s leadership, there is likely to be a post-election reevaluation by the CFPB of its agenda.  The agenda sets the following timetables for key rulemaking initiatives:

Arbitration.  The CFPB released its proposed arbitration rule in May 2016 and the comment period ended on August 22, 2016.  The Fall 2016 agenda indicates that the CFPB “is reviewing and considering comments on the proposed rule” as it “considers development of a final rule for early 2017.”  The agenda gives a February 2017 estimated date for a final rule.  In recent days, we have heard speculation that the CFPB will issue a final rule before Donald Trump’s inauguration as President on January 20.  As we discussed in a recent blog post, a final arbitration rule or other new final rules issued by the CFPB (and potentially any final rules issued since late May 2016) could be nullified by Congress under the Congressional Review Act (CRA).  The CRA establishes a special set of procedures that allow Congress to pass a joint resolution disapproving a rule which cannot be filibustered in the Senate and can be passed by only a simple majority vote.

Payday, title, and deposit advance loans.  The CFPB released its proposed rule on payday, title, and high-cost installment loans in June 2016 and the comment period ended on October 22, 2016.  While there has also been speculation that the CFPB will attempt to finalize a rule by January 20, that possibility seems more remote given the unprecedented level of comments (approximately one million) received by the CFPB and the complexity of the proposed rule.  The Fall 2016 agenda does not give an estimated date for a final rule.

Debt collection.  In November 2013, the CFPB issued an Advance Notice of Proposed Rulemaking concerning debt collection.  In July 2016, it issued an outline of the proposals it is considering in anticipation of convening a SBREFA panel.  It has been reported that the SBREFA panel for the CFPB’s debt collection rulemaking met with small entity representatives (SER) at the end of August 2016.  Within 60 days from the date it is considered to have “convened,” the panel must submit a report to the CFPB on the input received from the SERs.  However, the report will not become public until the CFPB issues its proposed rule.

The CFPB’s proposals only cover “debt collectors” that are subject to the FDCPA.  They are not intended to apply to a first-party creditor collecting its own debts or to a servicer when collecting debts that were current when servicing began to the extent the creditor or servicer would not be a “debt collector” under the FDCPA.  When it issued the proposals, the CFPB stated that it “expects to convene a second proceeding in the next several months” for creditors and others engaged in debt collection not covered by the proposals, noting that it believes a separate SBREFA process “is the most efficient way to proceed, particularly because it will allow participants to provide more focused and specific insights.”

In the Fall 2016 agenda, the CFPB states that it “expects to convene a separate SBREFA proceeding focusing on companies that collect their own debts in 2017.”  The agenda gives a February 2017 estimated date for further prerule activities.

Overdrafts.  The CFPB issued a June 2013 white paper and a July 2014 report on checking account overdraft services.  In the Fall 2016 agenda, as it did in its Fall 2015 and Spring 2016 agendas, the CFPB states that it “is continuing to engage in additional research and has begun consumer testing initiatives related to the opt-in process.”  Although the Spring 2016 agenda estimated an August 2016 date for further prerule activities, the new agenda moves that date to January 2017.  As we have previously noted, the extended timeline may reflect that the CFPB feels less urgency to promulgate a rule prohibiting the use of a high-to-low dollar amount order to process electronic debits because most of the banks subject to its supervisory jurisdiction have already changed their processing order.

Larger participants.  As it did in its Fall 2015 and Spring 2015 agendas, the CFPB states in the Fall 2016 agenda that it is considering “larger participant” rules “in markets for consumer installment loans and vehicle title loans for purposes of supervision.”  It also repeats its previous statement that the CFPB is “also considering whether rules to require registration of these or other non-depository lenders would facilitate supervision, as has been suggested to the Bureau by both consumer advocates and industry groups.”  (Pursuant to Dodd-Frank Section 1022, the CFPB is authorized to “prescribe rules regarding registration requirements applicable to a covered person, other than an insured depository institution, insured credit union, or related person.”)  While the Spring 2016 agenda estimated a December 2016 date for prerule activities, the new agenda estimates a May 2017 date.

Small business lending data.  Dodd-Frank Section 1071 amended the ECOA to require financial institutions to collect and maintain certain data in connection with credit applications made by women- or minority-owned businesses and small businesses.  Such data include the race, sex, and ethnicity of the principal owners of the business.  While the Spring 2016 agenda estimated a December 2016 date for prerule activities, the new agenda estimates a March 2017 date.  The CFPB states in the Fall 2016 agenda that it “is focusing on outreach and research to develop its understanding of the players, products, and practices in business lending markets and of the potential ways to implement section 1071.  The CFPB then expects to begin developing proposed regulations concerning the data to be collected and determining the appropriate procedures and privacy protections needed for information-gathering and public disclosure under this section.”

Mortgage rules.  In July 2016, the CFPB issued a proposed rule containing both substantive amendments and technical corrections to the final TILA-RESPA Integrated Disclosure rule.  The comment period on the proposal ended on October 18, 2016 and the Fall 2016 agenda gives a March 2017 estimated date for issuance of a final rule.  The Fall 2016 agenda gives a March 2017 estimated date for a proposed rule “to amend certain provisions of Regulation C to make technical corrections and to clarify certain requirements under Regulation C” and a proposed rule “to amend Regulation B to reconcile how creditors may collect information about the ethnicity and race of applicants to clarify how financial institutions and creditors subject to Regulation C and Regulation B may comply with both regulations.”

Student Loan Servicing and Consumer Reporting.  As they were in the Fall 2015 and Spring 2016 agendas, both of these topics continue to be listed in the Fall 2016 agenda as “long-term action” items with no estimated dates for further action.  The Office of Management and Budget defines “long-term action” items as “items under development but for which an agency does not expect to have a regulatory action within 12 months after publication of this edition of the Unified Agenda.”

Last week, the Wall Street Journal reported that the CFPB is pushing to finalize its arbitration rule before Donald Trump’s inauguration as President on January 20.  The comment period on the proposed rule closed on August 22, 2016.

The article suggested that the CFPB may also attempt to finalize its rule on payday, title, and high-cost installment loans by January 20.  However, the possibility of the CFPB accomplishing that seems more remote given that the comment period on the CFPB’s proposal closed on October 7, 2016 and the CFPB received an unprecedented level of comments, numbering approximately one million.

If the CFPB were to issue a final arbitration rule or any other new final rule by January 20, it could find its efforts thwarted by Congress.  A relatively obscure law entitled the “Congressional Review Act” (CRA) establishes a special set of procedures through which Congress can nullify final regulations issued by a federal agency.  (Indeed, according to an article issued by the Congressional Research Service (CRS), the CRA could potentially be used to overturn final CFPB rules issued after mid-May 2016, which would include the CFPB’s final prepaid card rule issued on October 5, 2016.)

The CRA (5 U.S.C. Sections 801-808) was enacted in 1996 as part of the Small Business Regulatory Enforcement Fairness Act (SBREFA).  Under the CRA, an agency must submit a final rule to Congress and the Government Accountability Office before the rule can take effect.  Upon receipt of the rule by Congress, members of Congress have a specified time period during which they can submit and take action on a joint resolution disapproving the rule.  If the resolution is passed by both the House and Senate, it is sent to the President for signature or veto.  Most significantly, the CRA’s special procedures establish a process under which a joint resolution of disapproval cannot be filibustered in the Senate and can be passed with only a simple majority.

The enactment of a CRA joint resolution disapproving a final rule prevents the rule from taking effect.  If a rule has already become effective, it no longer continues in effect and “shall be treated as though such rule had never taken effect.”  The joint resolution’s enactment would also bar an agency from reissuing the rule “in substantially the same form” or issuing a “new rule that is substantially the same” as the disapproved rule “unless the reissued or new rule is specifically authorized by a law enacted after the date of the joint resolution disapproving the original rule.”  A CRS report on the CRA states that the CRA does not define the meaning or scope of “substantially the same,” what criteria should be considered in determining if a reissued or new rule is “substantially the same,” or who would make such a determination.

The CRA also provides that “[n]o determination, finding, action, or omission under this chapter shall be subject to judicial review.”  The CRS report indicates that two federal appeals courts and several federal district courts have determined that this CRA provision prohibits judicial review of any question arising under the CRA while one federal district court ruled that it could review a claim based on noncompliance with the CRA.

According to the CRS, the CRA procedure has only successfully overturned one agency final rule—a 2000 OSHA workplace-related rule.  The reason most commonly cited for why only one rule has been successfully overturned using the CRA over the 20 years since its enactment is that a de facto supermajority vote is required to enact a CRA resolution of disapproval.  While all congressional votes related to such a resolution can be simple majority votes, if the resolution is vetoed by the President, a two-thirds majority of both houses of Congress would be necessary to override the veto.  It is expected that a President will veto a joint resolution attempting to strike down a rule issued by his or her own Administration.  (The CRS indicates that in the 114th Congress (2015-2016), President Obama has vetoed four CRA disapproval resolutions.)

The election of Donald Trump as President presumably makes it unlikely that a CRA joint resolution disapproving a final CFPB arbitration rule would face a Presidential veto.  Having retained control of the House and Senate, Republicans would therefore be able to use the CRA to nullify a final CFPB arbitration rule through a simple majority vote and not have to overcome the hurdle of a supermajority vote.

In addition to the CRA, CFPB rulemaking could face another potential roadblock should the D.C. Circuit’s decision in CFPB v. PHH Corporation take effect.  That roadblock is Executive Order 12866, which requires a federal agency that is not considered an “independent regulatory agency” to submit regulations that qualify as a “significant regulatory action” to the Office of Information and Regulatory Affairs (OIRA) within the Office of Management and Budget for review before publication in the Federal Register.  For the reasons discussed in our recent blog post, the CFPB could be required to submit any rules it has not yet finalized for OIRA review and even face challenges to its final rules, including those that have already become effective, on the basis that such rules were not, but should have been, reviewed by OIRA.

The FTC has announced that to study the effectiveness of various class action settlement notice programs, it has issued orders to eight claims administrators requiring them to provide information on their procedures for notifying class members about settlements and the response rates for various methods of notification.

It is anticipated that such information will demonstrate that only a very small fraction of class members who must file claims to participate in a settlement fund actually do so.  Such information would provide support for critics of the CFPB’s proposed arbitration rule and serve as further evidence that the CFPB’s premise that consumers obtain more meaningful relief through class actions than in arbitration is incorrect.

The CFPB’s own arbitration study included data showing that even class members entitled to benefits frequently fail to obtain them.  The study found that in “claims made” class action settlements, the unweighted average claims rate was 21 percent and median was 8 percent.  The weighted average claim rate was only 4 percent.  Moreover, claims rates fell nearly 90 percent if documentary proof was required.  Presumably, the funds not distributed to the class members either reverted to the company or were used for a cy pres distribution

For more information on the FTC’s announcement, see our legal alert.

The CFPB’s proposed arbitration rule is the subject of an article written by Ballard Spahr partners Alan Kaplinsky and Mark Levin for the Washington Legal Foundation.

Entitled “CFPB’s Proposed Arbitration Rule Benefits Class-Action Lawyers at the Expense of Consumers,” the article focuses on the proposal’s financial impacts.  The article explains why the proposal would inflict extreme financial harm on financial services providers, federal and state court systems, and consumers and is therefore not in the public interest, for the protection of consumers, or consistent with the CFPB’s study of consumer arbitration.

 

Republican Congressman Randy Neugebauer, who chairs the House Financial Services Committee’s Subcommittee on Financial Institutions and Consumer Credit, and Democratic Congressman W. Lacy Clay, the Subcommittee’s Ranking Member, have sent a letter to Director Cordray asking the CFPB “to consider providing a safe harbor in any final rule that will preserve the use of arbitration as a viable dispute resolution forum.”

In their letter, the Congressmen comment that despite the fact that the CFPB’s arbitration study “found that arbitration is generally faster, more convenient, and results in better outcomes for consumers than in-court litigation,” the CFPB’s proposed arbitration rule seeks to expand the use of class actions by prohibiting class action waivers in arbitration agreements.  They point out that many observers have concluded that such a prohibition “will result in financial institutions dissolving their consumer-friendly arbitration programs as they are forced to bear significantly increased exposure associated with class action litigation. ”  (We are among the observers who have expressed the opinion that the CFPB’s proposal would dramatically change many firms’ cost-benefit analysis enough to convince them to stop using arbitration for individual claims as well.)  The Congressmen state that this outcome “would leave many American consumers seeking to remedy small dollar disputes without a viable forum for resolution.”

To avoid that outcome, the Congressmen ask the CFPB to consider providing a safe harbor in its final rule that would allow companies to continue to use class action waivers in their arbitration agreements.  They suggest that the safe harbor might require the adoption of certain pro-consumer features, such as the best practices required by the American Arbitration Association.  They also suggest that a safe harbor could require companies to use model arbitration agreements developed by the CFPB.