CFPB Director Richard Cordray yesterday sent a letter to President Trump asking him to uphold the Bureau’s arbitration rule even though the Senate recently joined the House in authorizing a repeal of the rule under the Congressional Review Act.

Director Cordray’s letter states that without the arbitration rule, military service members will “get cheated out of their hard-earned money and be left helpless to fight back.”   That is not the case, and he knows it.  First, as discussed in the arbitration rule and as we have previously clarified, the Military Lending Act already regulates the use of arbitration agreements in most consumer credit contracts entered into by active-duty servicemembers and their dependents.  Therefore, it will not be affected by repeal of the CFPB rule.

Second, further contradicting his letter, Director Cordray acknowledged in the arbitration rule that arbitration is no more harmful to military service members than litigation: “Neither the [CFPB’s consumer arbitration] Study nor the commenters offered evidence demonstrating that individual arbitrations involving servicemembers and their families are inferior to individual litigation in terms of remedying consumer harm or unique from arbitration involving non-servicemembers.”

Director Cordray’s letter to the President omitted both of these important points.  The letter should be disregarded by the President as he prepares to sign H.J.Res.111 into law.

We are pleased to report that the U.S. Senate voted last night, 51 to 50, to override the Consumer Financial Protection Bureau’s final arbitration rule.  The rule would have prohibited the use of class action waivers in consumer arbitration agreements, among other provisions.

The Senate took action pursuant to the Congressional Review Act (CRA), which allows the House of Representatives and Senate to override a federal agency’s final rule by passing a resolution of disapproval by a simple majority vote within a specified time period following the rule’s receipt by Congress.  In July 2017, the House passed a joint resolution of disapproval by a vote of 231-190.

Prior to the House vote, the White House issued a statement supporting the joint resolution and stating that if the resolution “were presented to the President in its current form, his advisors would recommend that he sign it into law.”  After last night’s Senate vote, the White House issued a statement applauding the Senate’s action.  Accordingly, we assume that President Trump will promptly sign the resolution into law.

The Senate passed the resolution of disapproval despite Senator Elizabeth Warren’s (D-MA) strong defense of the CFPB’s rule as well as intense lobbying in support of the rule by plaintiffs’ lawyers and consumer advocates.  The arbitration rule became effective on September 18, 2017, with a March 19, 2018, mandatory compliance date.  Under the CRA, enactment of a resolution of disapproval blocks a rule from taking effect or continuing.  The rule cannot be reissued in substantially the same form, nor can a new rule that is substantially the same be issued, unless the reissued or new rule is specifically authorized by a law enacted after the date of the resolution of disapproval.

Ballard Spahr attorneys submitted comments on the arbitration rule to the CFPB on behalf of the American Bankers Association, the Consumer Bankers Association, and the Financial Services Roundtable.  Alan Kaplinsky, who leads the firm’s Consumer Financial Services Group, provided testimony on behalf of the industry at three CFPB field hearings on the arbitration rule.

Earlier today, OCC Acting Comptroller Keith Noreika issued a statement in which he called the Senate vote “a victory for consumers.”  The Senate is to be congratulated for its courageous action and for recognizing, as we have advocated during the past five years of rulemaking, that arbitration benefits consumers, while class action litigation benefits only the plaintiffs’ bar.

Enough is enough!

I recognize that reasonable minds can differ with respect to whether the Senate should override the CFPB arbitration rule.  However, it is inexcusable when plaintiffs’ lawyers and consumer advocates blatantly distort the impact that the override of the arbitration rule will have on members of the military.

In a recent article urging the Senate not to override the arbitration rule, Philadelphia plaintiffs’ lawyer James Francis argued that the override would “strip away our right of access to the courts – a right that is especially important for service members.”  In an attempt to justify the rule, he claimed that “[m]ilitary consumers report identity theft at roughly double the rate of the general public” and linked that claim to the recent Equifax data breach.  According to Mr. Francis, “[c]lass actions are uniquely suited to helping our military.”

In a similar vein, consumer advocate Paul Bland wrote in a recent tweet that the CFPB rule is “also an attack on the rights of service members, who’ve often gotten real relief from cheating banks through class actions.”

Like some lawmakers, Mr. Francis and Mr. Bland have either chosen to ignore or have overlooked the Military Lending Act, which already prohibits the use of arbitration agreements in most consumer credit contracts entered into by active-duty servicemembers and their dependents.  Since 2007, creditors have been prohibited by the MLA from including arbitration agreements in contracts for consumer credit extended to active-duty service members and their dependents where the credit is a closed-end payday loan with a term of 91 days or less in which the amount financed does not exceed $2,000, a closed-end vehicle title loan with a term of 181 days or less, or a closed-end tax refund anticipation loan.  In 2015, the Department of Defense adopted a final rule that dramatically expanded the MLA’s scope.

The final rule extended the MLA’s protections to a host of additional products, including credit cards, installment loans, private student loans and federal student loans not made under Title IV of the Higher Education Act, and all types of deposit advance, refund anticipation, vehicle title, and payday loans. The rule applies to transactions or accounts consummated or established after October 3, 2016 for most products, and credit card accounts consummated or established after October 3, 2017.

Mr. Francis’ attempt to link the arbitration rule to the Equifax data breach is also a distortion.  As we have previously commented, the effort of consumer advocates to portray the Equifax data breach as an example of why class actions are needed to protect consumers is a tempest in a teapot.  The breach has nothing to do with the arbitration rule.  While the rule covers some credit reporting company activities, it does not appear to cover data breaches such as this one.

In a scathing report released today, the U.S. Department of the Treasury concludes that the CFPB’s final arbitration rule “failed to meaningfully evaluate whether prohibiting mandatory arbitration clauses in consumer financial contracts would serve either consumer protection or the public interest — its two statutory mandates.”  Moreover, according to the report, the arbitration rule will impose “extraordinary” economic costs on businesses and consumers by generating a “massive” increase in class action litigation that will not benefit consumers but will effect a “large wealth transfer” to their lawyers.

The Treasury Department report follows a recent analysis by the Office of the Comptroller of the Currency which, as we reported, found that the arbitration rule will significantly increase the cost of consumer credit.

The Treasury Department report sweeps even more broadly and undercuts virtually all of the factual and legal underpinnings of the arbitration rule, exposes its numerous fundamental defects and turns the CFPB’s own data on their head.   It concludes, among other things, that:

  • The rule will generate more than 3,000 additional federal court class actions over the next five years which will cause affected businesses to incur more than $500 million in additional legal defense fees, $330 million in payments to plaintiff’s lawyers and $1.7 billion in additional settlements.  This excludes the cost of additional state court class actions, which the CFPB was unable to calculate but which we have estimated as adding another $2.6 billion to industry defense costs.
  • Although the vast majority of consumer class actions deliver “zero relief” to putative class members, the arbitration rule “will transfer an additional $330 million over five years to the plaintiffs’ bar.”
  • The CFPB failed to make “a reasoned showing that increased consumer class action litigation will result in a net benefit to consumers or to the public as a whole,” failed reasonably to consider “whether improved disclosures regarding arbitration would serve consumer interests better than its regulatory ban,” did not adequately assess “the share of class actions that are without merit” and offered “no foundation for its assumption that the rule will improve compliance with federal consumer financial laws.”

We couldn’t agree more.

The Treasury Department report is extremely timely, as the Senate is poised to vote on whether to repeal the arbitration rule and the finance industry has sued the CFPB to enjoin its implementation.

In an important development in the federal court lawsuit by industry groups seeking to overturn the CFPB’s arbitration rule, the plaintiffs yesterday filed a motion for a preliminary injunction.  The motion requests entry of an order “that (1) enjoins the 180-day implementation period, which commenced on the date the Rule became effective, so that—if the Rule ultimately is upheld—plaintiffs’ members will have the full 180-day implementation period established by the Rule to come into compliance; and (2) prohibits defendants from implementing or enforcing the Arbitration Rule pending the completion of judicial review.”  The motion and supporting memorandum of law are available here.

Since last summer, Acting U.S. Comptroller of the Currency Keith A. Noreika and CFPB Director Richard Cordray have exchanged polar-opposite views on whether the CFPB’s final arbitration rule should be repealed.  Both are seeking to persuade Senators who may still be undecided as the deadline for Congressional Review Act action draws closer.

The debate began in July, when, as we reported, Acting Comptroller Noreika and Director Cordray exchanged a series of letters in which Mr. Noreika raised OCC concerns about the arbitration rule’s impact on the safety and soundness of the U.S. banking system.  Then, in late September, as we also reported, the OCC issued a report that contradicted key conclusions of the CFPB that supposedly supported the rule.  The CFPB did not find any statistically significant evidence of increases in the cost of consumer credit associated with banning arbitration clauses in credit card contracts.  However, the OCC, reviewing the same data, found “a strong probability of a significant increase in the cost of credit cards as a result of eliminating mandatory arbitration clauses.”  In particular, it found that there could be as high as a three-and-a-half percent annual percentage rate increase for consumers who would be affected by the rule, which translates to a 25 percent increase in credit costs.  In addition, the OCC stated that additional research would be required “to explore the potential effect on consumer payments, their ability to pay the higher cost and the potential for an increase in delinquencies, or changes in the availability of certain financial products intended to meet the financial needs of consumers.”

The Noreika-Cordray dispute has now escalated in the last few days.  In a recent op-ed in The Hill, Acting Comptroller Noreika argued forcefully and persuasively that the Senate should vacate the final arbitration rule because the CFPB has failed to provide data that support the rule and also “failed to disclose the costs to consumers that will likely result from the rule’s implementation.  Consumers deserve better, and so do small and regional banks.”  On the same day, Cordray  fired back, releasing a letter he had written to Senator Sherrod Brown that was highly critical of the OCC’s report and also argued that the rule does not threaten the safety and soundness of banks.  Attached to the letter was a 7-page memo from the CFPB’s Office of Research concluding that the OCC report rested on “incorrect statistical inference and a failure to correctly consider the full body of evidence.”   Yesterday, Director Cordray followed up with his own op-ed in The Hill calling the OCC’s data analysis “embarrassing” and characterizing Acting Comptroller Noreika’s safety and soundness concerns as “farfetched.”   Referring to a federal court lawsuit recently filed by industry groups to overturn the rule, Director Cordray concludes his article by stating, “The fight thus will now be decided in the courts and need not be decided in the Senate.”

If this were a prize fight (in Philadelphia we like the Rocky analogy), the championship belt should go to Acting Comptroller Noreika.  We are not professional statisticians, but to us it is just plain common sense that when 53,000 companies are expected to incur between $2.6 and $5.2 billion dollars in addition costs to handle 6,042 additional class actions spawned by the elimination of arbitration in the next five years and every five years thereafter — as the CFPB’s data clearly shows, consumers will pay more.  That simple truth is obscured by the CFPB’s research report, which tries to justify its attacks on the OCC by referring to “noisy” data and “p values.”

And that is what the Senate needs to keep in mind as the deadline for the CRA vote approaches: consumers will pay more unless the CFPB arbitration rule is repealed.  Contrary to Director Cordray’s remarks, the Senate vote is critical because tens of thousands of American businesses need clear and definitive guidance now on whether they need to prepare to be crushed by billions of dollars in defense costs that will go almost entirely to pay the fees of class action lawyers — while the average putative class member recovers an average of $32 if they are “lucky” enough to be in the 13% of class actions that returns anything to consumers.  Acting Comptroller Noreika delivered the knockout punch when he concluded in his op-ed: “Instead of mandating only one way to resolve disputes, consumers and banks should continue to have the option to resolve contractual differences in the same manner they do today … Consumers know for themselves what their best options are, and their regulators need to know that too.”

In a recent blog post, we estimated that, as a practical matter, November 16 was the last day on which the Senate could pass a resolution of disapproval under the Congressional Review Act to override the CFPB arbitration rule.  For the reasons explained below, we now think November 13 is a better estimate.

Under the CRA, to be eligible for the “fast track” procedures for Senate consideration that preclude a filibuster and allow the Senate to pass a resolution of disapproval resolution with a simple majority vote, the Senate must act on the resolution during a period of 60 Senate “session days” which begins on the date the rule is received by Congress or published in the Federal Register, whichever is later.  Since the Senate received the CFPB’s report on the arbitration rule on July 13 and the rule was published in the Federal Register on July 19, the 60 Senate “session days” for purposes of the CRA clock began on July 19, 2017.  Including this past Friday (October 13), there have been 40 Senate “session days” since July 19.

Our November 16 estimate was based on two assumptions.  First, we assumed that the Senate would be in regular session Monday through Thursday during the weeks it is not scheduled to be in recess.  Second, we assumed that the Senate would be in pro forma session on each Tuesday and Friday of a recess week.

Since publishing our blog post, we discovered that the Senate’s calendar has not been consistent with our first assumption.  During the first week of October, when the Senate was not scheduled to be in recess, it was in regular session Monday through Friday.  The Senate’s next scheduled recess is November 10-12.  Thus, if we now assume that the Senate will continue to be in regular session every weekday until November 10, the 60th session day for purposes of the CRA clock would be Monday, November 13.

As promised previously, here are further details on the lawsuit filed by industry groups against the CFPB to overturn the final arbitration rule.  The complaint largely mirrors our heavy criticism of the rule.  (For example, see here, here and here.)

The complaint asserts four principal arguments:

  1. The rule is the product of  “the unconstitutional structure that Congress gave the CFPB” in the Dodd-Frank Act, which gives the Director “an extraordinary degree of authority that is virtually unique in the federal system, and insulates the Director from control by either the President or Congress.”  (A similar argument is presently pending before the D.C. Circuit Court of Appeals in PHH v. CFPB).
  2. The rule violates the Administrative Procedure Act (“APA”) because “the CFPB failed to observe procedures required by law when it adopted the conclusions of a deeply flawed study that improperly limited public participation, applied defective methodologies, misapprehended the relevant data, and failed to address key considerations.”  In directing the CFPB to study the use of arbitration in consumer financial contracts and base any regulation of arbitration on the results of that study, Congress necessarily required the CFPB to conduct a fair, unbiased, and thorough study that that would produce reliable and accurate results.  Instead, the CFPB  “misstated or disregarded key data, reaching palpably invalid conclusions that understate the demonstrated effectiveness of arbitration and overstate the value of class-action litigation.”
  3. The rule also violates the APA because “it runs counter to the record before the [CFPB]” and is “the very model of arbitrary and capricious agency action.”   In particular, the CFPB “failed to address key considerations—among them, whether effectively eliminating arbitration in contracts subject to the CFPB’s jurisdiction would injure consumers.”  Moreover, the rule “is premised on conclusions that run counter to the administrative record before the [CFPB], which establishes that arbitration is effective in providing relief to consumers and that class-action litigation generally is not.
  4. The rule violates the Dodd-Frank Act because “it fails to advance either the public interest or consumer welfare: it precludes the use of a dispute resolution mechanism that generally benefits consumers (i.e., arbitration) in favor of one that typically does not (i.e., class-action litigation).”  The rule “effectively precludes use of an arbitration mechanism that provides the only realistic method by which consumers may obtain relief for the types of individualized claims that they typically regard as most important.  And it does so in the interest of encouraging class-action litigation, a procedure that provides substantial rewards to class-action lawyers but almost never produces meaningful relief for individual consumers.”

The complaint alleges that the CFPB reached a “preordained conclusion” to ban class action waivers which “ignored the data before it that demonstrated both the benefits of arbitration to consumers and the failure of class-action lawsuits to provide consumers with meaningful benefits.”  In addition, the CFPB failed to address “key policy questions,” including whether a rule mandating the availability of class-action litigation would lead to the complete abandonment of arbitration,” and made no serious effort “to weigh the comparative costs and benefits of implementing a regime that substitutes costly class-action litigation for efficient arbitration.”  The “inevitable practical consequence” of the rule, plaintiffs allege, is that businesses will abandon arbitration altogether” since they will face “the certainty of high litigation costs associated with class-action suits and therefore will not go to the expense of creating an alternative arbitration mechanism—for which business shoulders the lion’s share of the costs.”

The complaint seeks entry of a judgment vacating the arbitration rule and entry of orders staying the rule’s implementation pending the conclusion of judicial review and enjoining the CFPB and Director Cordray from enforcing the rule.  If the rule goes into effect, plaintiffs aver, “it will inflict immediate, irreparable injury” because “[p]roviders of consumer financial products and services will incur significant legal and compliance costs in adapting their businesses to the new rule,” and “the vast majority of these costs will be wasted, and not recoverable, if the [r]ule ultimately is deemed to be contrary to law.”  Moreover, “so long as the effects of the [r]ule are being felt, providers of such services will both be denied the benefits of arbitration and exposed to expensive class-action litigation.”

We will be following this litigation very closely and will provide updates on important developments.  We are also continuing to monitor whether the Senate will vote on the pending resolution to overturn the arbitration rule under the Congressional Review Act.

As we’ve mentioned, the finance industry recently filed suit to overturn the CFPB’s arbitration rule in the U.S. Federal District Court for the Northern District of Texas. Shortly after the case was filed, it was assigned to Judge Sidney A. Fitzwater.

Judge Fitzwater was appointed to the bench in 1986 by President Ronald Reagan. He had previously served as a state district judge, and was only 32 years old when he was appointed to the federal bench. According to the Almanac of the Federal Judiciary, before his appointment, he served on the Executive Committee for the Dallas County Republican Party, on the Executive Committee of the Texas Federation of Young Republicans, and as the Director of the Dallas County Republican Men’s Club.

By all accounts, Judge Fitzwater is a sharp, detail-oriented, and fair-minded judge. According to the Almanac, he’s referred to by attorneys who practice before him as “the smartest guy on the bench.” Practitioners quoted in the Almanac also say that he “listens to everything,” and that he is “perfectly prepared” for all of his hearings. They also say that “He follows the law. He will not substitute his own opinions. You are getting the law as he understands it. He is careful not to inject his personal view into the case.” He has received the Dallas Bar Association’s highest overall poll evaluation for federal judges on several occasions, including in 2017.

We have not been shy about criticizing the CFPB’s arbitration rule or the CFPB’s specious justification for it. If the reports on him are accurate, it appears that Judge Fitzwater will carefully analyze the issues and reach a thoughtful, independent decision.

Despite the filing of a lawsuit last Friday by a number of industry trade groups seeking to block implementation of the CFPB’s arbitration rule, we remain hopeful that the Senate will pass a resolution of disapproval under the Congressional Review Act to override the rule.  There has been considerable confusion about  the Senate deadline for passing a CRA resolution so we took a closer look.

Under the CRA, to be eligible for the “fast track” procedures for Senate consideration that preclude a filibuster and allow the Senate to pass a resolution of disapproval resolution with a simple majority vote, the Senate must act on the resolution during a period of 60 Senate “session days” which begins on the date the rule is received by Congress or published in the Federal Register, whichever is later.

Since the Senate received the CFPB’s report on the arbitration rule on July 13 and the rule was published in the Federal Register on July 19, the 60 Senate “session days” for purposes of the CRA clock began on July 19, 2017.  As of this past Friday (September 29), there were 33 Senate “session days” since July 19.

Accordingly, assuming that the Senate will be (1) in session Monday through Thursday during the weeks it is not scheduled to be in recess, and (2) in pro forma session on each Tuesday and Friday of a recess week, the 60 “session days” would end on November 21.  However, since November 21 falls during the week when the Senate is scheduled to be in recess for Thanksgiving, a vote is unlikely to take place during that week.  Thus, based on the foregoing assumptions, the last day for a Senate vote, as a practical matter, would be November 16.