House and Senate Republicans announced today that they are sponsoring Congressional Review Act resolutions to override the CFPB’s final arbitration rule, which was published in yesterday’s Federal Register. 

In the House, a press release published on the House Financial Services Committee’s website announced that a joint resolution (H.J. Res. 111), sponsored by Committee member Keith Rothfus and co-sponsored by all other Republican Committee members, has been introduced to disapprove the arbitration rule.

In the Senate, a press release on the Senate Banking Committee’s website announced that Committee Mike Crapo and Republican colleagues “will file” a CRA resolution to disapprove the arbitration rule.  The resolution has 23 co-sponsors in addition to Mr. Crapo, several of whom are not Banking Committee members.  Only one Republican Banking Committee member, Louisiana Senator John Kennedy, is not listed as a co-sponsor.

Neither press release includes or links to the resolution text.

 

 

In an opinion article published by The Hill entitled “The ‘consumer’ financial bureau chooses lawyers over consumers,” Rob Nichols, President and CEO of the American Bankers Association, explains why the CFPB’s final arbitration rule gives “a regulatory windfall to trial lawyers at consumers’ expense.”  Mr. Nichols urges Congress to use the Congressional Review Act to override the rule.

Click here to read the full article.

 

 

In a letter dated July 18, 2017 to Acting Comptroller Noreika purporting to respond to Acting Comptroller Noreika’s July 17 letter, Director Cordray continued to question how there could be “any plausible basis for [Acting Comptroller Noreika’s] claim that the arbitration rule could adversely affect the safety and soundness of the banking system.”  We shared how we would respond to Director Cordray’s question, pointing out the many flaws in his rationale for questioning the existence of “any plausible basis” for safety and soundness concerns arising from the CFPB arbitration rule.

In his July 17 letter to Director Cordray, so the OCC could complete its analysis of the arbitration rule’s impact on the federal banking system, Acting Comptroller Noreika repeated his prior request for the data used by the CFPB to develop and support its proposed rule.  Despite questioning Acting Comptroller Noreika’s basis for raising safety and soundness concerns, Director Cordray wrote in his July 18 response that “we are happy to share the data underlying our rulemaking.  I understand that our teams are in communication and we are in the process of assembling the data your staff has requested.”

Perhaps choosing to wait to respond to Director Cordray’s question until the OCC has reviewed the CFPB data and completed its analysis, Acting Comptroller is reported to have said only the following in a prepared statement released yesterday:

“Consenting to share the data is important progress.  I look forward to working with the OCC staff to conduct an independent review of the data and analysis in a timely manner to answer my prudential concerns regarding what impact the final rule may have on the federal banking system.”

The CFPB final arbitration rule was published in today’s Federal Register and has an effective date of September 18, 2017 and a mandatory compliance date of March 19, 2018.  The rule’s publication is a trigger for the filing of a petition with the Federal Stability Oversight Council to set aside the rule.

 

The letter-writing war between Director Cordray and Acting Comptroller Keith Noreika continues.  Director Cordray sent a letter dated July 18, 2017 to Acting Comptroller Noreika in which he purports to respond to Acting Comptroller Noreika’s July 17 letter to Director Cordray and continues to question how there could be “any plausible basis for [Acting Comptroller Noreika’s] claim that the arbitration rule could adversely affect the safety and soundness of the banking system.”  To support his conclusion, he relies on the CFPB’s economic analysis of the rule which “shows that its impact on the entire financial system (not just the banking system) is on the order of less than $1 billion per year.”  He then compares this to banking industry profits last year of over $171 billion.  He also points to the mortgage market (in which the use of pre-dispute arbitration provision is prohibited) which he states “is larger than all other consumer financial markets combined” and states that nobody suggests that the lack of arbitration poses a safety and soundness issue.  He states, “So on what conceivable basis can there be any legitimate argument that this poses a safety and soundness issue?”

Although I am sure that Acting Comptroller Noreika will respond to Director Cordray’s question, let me try to respond myself.

First, why is it a “given” that the CFPB’s cost estimates are reasonable?  The CFPB said it could not quantify expected costs of additional state court class actions and just assumed that they would be less than the costs of additional federal court class actions.  Shouldn’t the OCC be entitled to review the CFPB’s methodology and to conduct its own study of costs?  Let’s not forget that it is the OCC and the other prudential banking regulators, not the CFPB, that is responsible for ensuring the safety and soundness of the banking system.

Second, while banking industry profits last year were $171 billion, there is no assurance, as Director Cordray implies, that industry banking profits will continue to increase.  Indeed, during the last economic recession, particularly during 2008 and 2009, banking industry profits were minuscule with many banks sustaining large losses.  Furthermore, in assessing the impact of the arbitration rule on safety and soundness, it is not enough to focus on the industry as a whole.  Those numbers include the overwhelming majority of banks that are community banks who are rarely the target of class action litigation.  Instead, the CFPB and the OCC should focus on the larger banks that are often targeted by the class action lawyers.  As we learned from the economic crisis of 2008-2009, the failure of one large bank could have a domino effect and result in multiple failures which certainly would create safety and soundness concerns.  The point is that while the CFPB has estimated costs to the industry for the arbitration order, it has not conducted, and it lacks the expertise and experience to conduct, a study to assess the impact of the rule on bank safety and soundness.

Director Cordray has also overlooked why arbitration came into vogue about 15 or 20 years ago.  It was because banks and other consumer financial services providers were being crushed by an avalanche of class action litigation.  At the time, it was becoming a safety and soundness issue.  There is every reason to expect a similar avalanche of litigation to occur sometime after the compliance date of the rule.  Indeed, things may actually be worse now than they were 15 years ago because of the enactment of new federal and state consumer protection laws, like the TCPA, where there is no cap on class action liability.

Finally, Director Cordray’s reference to the mortgage industry is misplaced.  While arbitration provisions are prohibited in mortgages, the Uniform Mortgage Instruments contain language requiring a borrower to provide notice to the lender of a dispute and an opportunity to resolve the dispute before the borrower may participate in any litigation.  That language would potentially preclude a class from being certified.

The CFPB final arbitration rule is scheduled to be published in the Federal Register tomorrow, July 19.

The rule’s effective date will be the 60th day after publication and the mandatory compliance date will be March 19, 2018.  Based on our calculation, the effective date will be Monday, September 18, 2017 (since the 60th calendar day is Sunday, September 17).

The final rule’s publication in the Federal Register is a trigger for the filing of a petition with the Federal Stability Oversight Council to set aside the rule.  The Dodd-Frank Act (DFA) provides that such a petition must be filed “not later than 10 days” after a regulation has been published in the Federal Register.  The 10th calendar day after publication would be Saturday, July 29.  Since the DFA does not specify whether the term “day” means a “calendar” or a “business” day, it is uncertain whether the deadline for filing a petition with the FSOC will be July 29 or Monday, July 31.

A resolution of disapproval under the Congressional Review Act (CRA) is another potential route for overturning the arbitration rule.  According to a report prepared by the Congressional Research Service (CRS), the receipt of a final rule by Congress begins a period of 60 “days-of-continuous-session” during which a member of either chamber can submit a joint resolution disapproving a rule under the CRA.

For purposes of the CRA, a rule is considered to have been “received by Congress” on the later of the date it is received in the Office of the Speaker of the House and the date of its referral to the appropriate Senate committee.  The arbitration rule was received by the Speaker of the House on July 10 and referred to the Senate Banking Committee on July 13.

In calculating “days of continuous session,” every calendar day is counted, including weekends and holidays.  However, because the count is suspended for periods when either chamber (or both) is gone for more than three days (i.e. pursuant to an adjournment resolution), the deadline for when a CRA resolution to disapprove the arbitration rule would have to be submitted cannot be calculated with certainty.  Assuming no adjournment of the House or Senate, the 60th calendar day after the arbitration rule’s receipt by Congress would be September 11, 2017.

In order to be eligible for the special Senate procedure that allows a CRA disapproval resolution to be passed with only a simple majority, the Senate must act on the resolution during a period of 60 days of Senate session which begins when the rule is received by Congress and published in the Federal Register.  That deadline would appear to be either September 17 or 18, 2017.  (The CRS report indicates that if the House passes a joint resolution of disapproval, the Senate might only be able to use its special procedure if there is a companion Senate resolution.)

 

 

 

 

State bankers associations from all 50 states and Puerto Rico have sent a letter to Senate Majority Leader Mitch McConnell and Senate Minority Leader Charles Schumer urging them to support efforts to override the CFPB’s final arbitration rule under the Congressional Review Act.

The associations state that the rule “would create a windfall for unscrupulous class-action attorneys, provide little or no relief to harmed consumers, and effectively eliminate an accessible alternative to the often-daunting judicial system.”  They assert that because most consumer disputes are unique and not appropriate for class actions, “shutting down arbitration will leave this vast majority of consumers with only one option: the expense and frustration of courtroom litigation.”  They also state that the CFPB ignored data showing that the average award to consumers in arbitration is substantially greater than the average amount received by consumers in class actions and effectively eliminated arbitration “without proposing a reasonable alternative process for timely, low-cost resolution of consumer disputes.”

Keith Noreika, the Acting Comptroller of the Currency, has sent a letter dated July 17 to Director Cordray asking him to delay publication of the CFPB’s final arbitration rule in the Federal Register.  The July 17 letter responds to Director Cordray’s July 12 letter to Mr. Noreika.  In his July 12 letter, Director Cordray responded to Mr. Noreika’s July 10 letter in which he stated that OCC staff had expressed safety and soundness concerns arising from the proposed arbitration rule’s potential impact on U.S. financial institutions and their customers.

In addition to raising safety and soundness concerns, Mr. Noreika’s July 10 letter asked Director Cordray to provide the data used by the CFPB to develop and support its proposed arbitration rule.  In his July 17 letter, Mr. Noreika repeats his data request, commenting that “despite your prior telephonic and in-person assurances that we would have access to the CFPB’s data, your July 12 letter ignores my request.”  While stating that he “appreciate[s]” Director Cordray’s assurances in his July 12 letter that the final arbitration rule does not have any safety and soundness impact on the federal banking system, Mr. Noreika also observes that “the CFPB, by design, is not a safety and soundness prudential regulator.”

Mr. Noreika explains that he asked the OCC’s Economics Department to analyze the proposed rule for its impact on the federal banking system when he became aware of the proposal several weeks after becoming Acting Comptroller and, so that the OCC could complete its review, was asked by the OCC’s chief economist on July 5 to request the CFPB data.  Mr. Noreika adds that he “had hoped to discuss this request with [Director Cordray] prior to the release of the Final Rule, but the timing of the release of the Final Rule was not shared with me in advance.”  While expressing appreciation for Director Cordray’s offer in his July 12 letter to have the CFPB staff review its arbitration study and rulemaking analysis with OCC staff, Mr. Noreika states that such review would “be helpful, but not sufficient, to allay my concerns.”

Mr. Noreika, in his July 17 letter, not only repeats his request for the CFPB data, but also asks Director Cordray to delay publication of the final arbitration rule in the Federal Register “until my staff has had a full and fair opportunity to analyze the CFPB data so that I am able to fulfill my safety and soundness obligations.”  Mr. Noreika’s request for the publication delay is undoubtedly tied to the timing in the Dodd-Frank Act for an agency that is a member of the Financial Stability Oversight Council (FSOC) to file a petition with the FSOC to set aside a CFPB final regulation.  A member agency can file such a petition with the FSOC if the member agency “has in good faith attempted to work with the Bureau to resolve [safety and soundness or financial system stability] concerns” and files the petition no later than 10 days after the regulation has been published in the Federal Register.  If a petition is filed, any member agency can ask the FSOC Chairperson (i.e. Treasury Secretary Mnuchin) to stay the effectiveness of a regulation for up to 90 days from the filing.

 

As part of its “Class Action Fairness Project,” the FTC is seeking comment on its plans to use an Internet panel to conduct research on class action notices.  According to the FTC’s Federal Register notice, the project “strives to protect injured consumers from settlements that provide them with little to no benefit and to protect businesses from the incentives such settlements may create for the filing of frivolous lawsuits.”  Actions taken by the FTC as part of the project include monitoring class actions and filing amicus briefs or intervening in appropriate cases; coordinating with state, federal, and private groups on important class action issues; and monitoring the progress of legislation and class action rule changes.  Comments in response to the FTC’s notice will be due on or before August 17, 2017.

In 2015, the FTC announced its plans to study whether consumers receiving class action notices understand the process and implications for opting out of a settlement, the process for participating in a settlement, and the implications for doing nothing (Notice Study).  It also announced that it planned to conduct a study to determine what factors influence a consumer’s decision to participate in a class action settlement, opt out of a class action settlement, or object to the settlement (Deciding Factors Study).

In the new notice, the FTC states that as part of the Notice Study, it proposes to conduct an Internet-based consumer research study to explore consumer perceptions of class action notices.  Using notices sent to class members in various nationwide class action settlements and “streamlined versions designed by the FTC staff,” the study will focus on notices sent to individual consumers via email and will examine whether variables such as the sender’s email address and subject line impact a consumer’s perception of and willingness to open an email notice.  The FTC plans to send an Internet questionnaire to participants drawn from an Internet panel with nationwide coverage maintained by a consumer research firm that operates the panel.

While the FTC plans to assess consumer comprehension of the options conveyed by the notice, including the process for participating in the settlement and the implications of consumer choice, in the Notice Study, it no longer plans to examine whether consumers understood the implications of opting out of a settlement,  According to the FTC, it has determined that the opt-out issue is more appropriately addressed in the Deciding Factors Study.

In November 2015, the FTC 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.  While the FTC notes that it has used data obtained through the orders to inform the Notice Study and that such data will also be used to inform its Deciding Factors Study, it does not provide any information about what such data revealed.  We had commented that the response rate data provided to the FTC by the claims administrators was expected to show extremely low response rates (i.e., less than 5 percent) in most cases, providing support for critics of the CFPB’s proposed rule to prohibit providers of certain consumer financial products and services from using a pre-dispute arbitration agreement that contains a class action waiver.

That rule has now been finalized and like the CFPB’s proposed rule, is based on the CFPB’s view that consumers obtain more meaningful relief through class actions than in arbitration.  Low average response rates would be further evidence that the CFPB’s premise is incorrect and arbitration is more beneficial to consumers than class actions.

 

 

 

 

 

Recently, Professor Jeff Sovern criticized Senator Tom Cotton of Arkansas for announcing that he would seek to block the CFPB’s final arbitration rule using the Congressional Review Act.  Professor Sovern quoted Senator Cotton as stating that the rule “‘ignores the consumer benefits of arbitration and treats Arkansans like helpless children, incapable of making business decisions in their own best interests ….’”  According to Professor Sovern, this rationale for opposing the rule is flawed because consumers are generally not aware of the arbitration clauses in their financial contracts and “don’t understand” them.  Moreover, he asserted, “[i]f we were to take Senator Cotton’s logic to its extreme, we wouldn’t require prescriptions for medications, because after all, requiring prescriptions assumes patients are incapable of making medical decisions in their own best interests.  We wouldn’t require cars to be safe, because such requirements assume consumers can’t make decisions about whether they want a safe car or not.”

Professor Sovern is missing the point.  If consumers — notwithstanding the near universal legal principle that people are legally responsible for understanding the contracts they enter into — are not aware of the arbitration clause in their financial contracts, it is because other features of the contract (for example, interest rate, fees, etc.) are more immediately important to them.  And, if consumers “don’t understand” arbitration clauses — notwithstanding that most financial services providers strive to make them as consumer-friendly and understandable as possible — it is because the CFPB has forsaken its responsibility to help educate consumers about arbitration.   We have urged the CFPB for the past several years to have its Consumer Education and Engagement division educate consumers about the relative costs and benefits of arbitration and litigation, particularly class action litigation.  Regrettably, it has steadfastly refused to do so.

It is not that educating consumers about arbitration is impossible or even difficult.  The CFPB itself has gone to great lengths to educate its own employees about the use of alternative dispute resolution to resolve workplace disputes.  And, just a few days ago, Consumer Reports published an article directed to consumers titled, “How to Make Arbitration Work in Disputes With Your Bank.”  The bottom line is that the CFPB made a policy judgment that consumers are better off learning about class actions rather than arbitration.

In the final rule, the CFPB stated that it “is skeptical as to whether it is realistic to believe that all or most consumers could be educated about the terms of arbitration agreements to significantly improve consumer attitudes or awareness.”  Yet at the same time that it issued the final rule, the CFPB released a video on YouTube titled, “CFPB’s New Arbitration Rule: Take Action Together.”  The video urges consumers to “[w]atch to see how the CFPB’s new rule will ban mandatory arbitration clauses that deny groups of people their day in court.  Many consumer financial products like credit cards and bank accounts have clauses in their contracts that prevent consumers from joining together to sue their bank or financial company for wrongdoing.  The new rule will deter wrongdoing and allow consumers to pursue justice and relief by prohibiting companies from using arbitration clauses to block group lawsuits.”

In terms of education, the CFPB unconscionably made no effort at all to educate consumers about arbitration — except to convey the message that they are bad — and completely tilted the playing field in favor of class actions.  Hyperbolically analogizing arbitration clauses to medical prescriptions and car safety does nothing to gloss over that unfortunate fact.

 

 

 

This Wednesday, July 19, the U.S. Chamber’s Center for Capital Markets Competitiveness  and U.S. Chamber Institute for Legal Reform will hold an event in Washington, D.C. entitled “CFPB’s Anti-Arbitration Rule: Analysis & Implications.”

The scheduled speakers include Senator Tom Cotton, who has announced the he plans to draft a resolution of disapproval to overturn the arbitration rule under the Congressional Review Act.