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Director Richard Cordray have exchanged polar-opposite views on whether the CFPB’s final arbitration rule should be repealed.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:
- 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).
- 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.”
- 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.
- 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.
The U.S. Chamber of Commerce, American Bankers Association, the Consumer Bankers Association, Financial Services Roundtable, American Financial Services Association, Texas Association of Business, Texas Bankers Association, and nine chambers of commerce located throughout Texas today filed a lawsuit in Texas federal court challenging the Consumer Financial Protection Bureau’s final arbitration rule.
The lawsuit seeks to stay implementation of the arbitration rule, a declaration that it is unlawful and other relief. The case has been assigned to Judge Sidney A. Fitzwater, U.S. District Court for the Northern District of Texas (Dallas). We will be providing more details next week.
The Military Lending Act (MLA) will apply to credit card accounts starting Tuesday, October 3. The final rule took effect last October but provided a one-year exemption for “credit extended in a credit card account under an open-end (not home-secured) consumer credit plan.” Although the final rule permits the Secretary of Defense to extend the exemption for up to one year (October 3, 2018), the DoD declined to do so and is allowing the exemption to expire next week.
The MLA final rule imposes a host of requirements in connection with extensions of “consumer credit” to active-duty servicemembers and their dependents (“covered borrowers”), including a 36-percent cap on the Military Annual Percentage Rate (MAPR), substantive oral and written disclosures, and prohibitions against subjecting covered borrowers to certain contractual terms. In particular, creditors are prohibited by the final rule from including pre-dispute arbitration provisions in consumer credit contracts extended to covered borrowers, a fact that has been overlooked (or ignored) by some proponents of the CFPB’s arbitration rule. As such, even if Congress were to repeal the CFPB arbitration rule using the Congressional Review Act, servicemembers and their dependents who are protected by the MLA would still have the right to take their cases to court.
Credit card issuers should take steps to ensure that they (and their servicers) are prepared to comply with the MLA final rule with respect to credit card accounts opened on or after Tuesday, October 3.
In a September 20 report, the Office of the Comptroller of the Currency (OCC) seriously undermined the integrity and completeness of the CFPB’s empirical study of consumer arbitration that purports to be the foundation for its final arbitration rule. In its study, the CFPB concluded that it 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 an 88% chance that the total cost of credit will increase and a 56% chance that costs will increase by 3% or more. The average increase in the total cost of credit is expected to be 3.43%. 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 OCC Report is another compelling reason why the Senate should vote to repeal the arbitration rule under the Congressional Review Act. It shows that the conclusions drawn by the CFPB from its study data cannot be trusted, and its research was incomplete. The fact that the CFPB underestimated the economic impact of the arbitration rule on consumers raises questions whether it also underestimated the financial impact of the rule on financial services companies. The CFPB estimated that the arbitration rule will result in 6,042 additional federal and state court class actions over the next five years that will cost companies between $2.6 billion and $5.3 billion to defend. As if these figures were not staggering enough, there is now real concern that they are too low!
The CFPB has issued a small entity compliance guide for its arbitration rule. The rule became effective on September 18, and compliance with the rule is required with regard to pre-dispute arbitration agreements entered into on or after March 19, 2018.
The Senate has before it a joint resolution under the Congressional Review Act to override the arbitration rule. In July 2017, the House passed a CRA joint resolution of disapproval by a vote of 231-190. If the Senate passes the resolution, President Trump is expected to sign it into law.
Under the CRA, enactment of a resolution of disapproval to override the arbitration rule would block the rule from continuing in effect. Should that happen, the CFPB’s guide to compliance could become the regulatory equivalent of newspapers with the headline “Dewey Defeats Truman.”