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.

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.”

 

In a mistaken attempt to justify the CFPB’s arbitration rule, supporters are pointing to the need to protect the rights of military servicemembers and the recent Equifax data breach.  On September 20, Democratic Senator Jack Reed will host an event entitled “The CFPB Forced Arbitration Rule,” which is described as a briefing for Senate staff and press members.

According to the event announcement, the participants will discuss how the CFPB’s arbitration rule “restores the rights of servicemembers, military families and consumers.”  Obviously overlooked (or ignored) by Senator Reed and the other participants is the fact that federal law already prohibits the use of arbitration agreements in most consumer credit contracts entered into by active-duty servicemembers and their dependents.  More specifically, this prohibition is contained in the Military Loan Act.

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 already became effective for transactions or accounts consummated or established after October 3, 2016 for most products, and will become effective for credit card accounts consummated or established after October 3, 2017.

The event announcement also indicates that there will be a discussion of how the arbitration rule impacts Equifax customers.  As we have previously commented, the attempt of consumer advocates to link the Equifax data breach to the CFPB’s arbitration rule 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.

Professor Jeff Sovern has responded to our recent blog, “Senator Warren’s Numbers Don’t Add Up,” with a blog of his own.  He does not contest the main point of our blog, which was that Senator Warren’s claim that consumers don’t do well in arbitration is wrong.  He admits he found our discussion “interesting.”  We appreciate the compliment.

Professor Sovern does take issue with the short discussion near the end of our blog in response to Senator Warren’s remark that consumers rarely pursue individual arbitration.  We explained that most consumers resolve their disputes through companies’ informal dispute resolution procedures and also through on-line complaint portals provided by federal and state agencies.  “Is it true,” he asks, and where are the “statistics”?  Well, one such statistic is on the front of the CFPB’s website: the CFPB, through its on-line complaint portal, has handled more than 1.2 million customer complaints, and 97% of consumers get timely replies when the CFPB sends their complaints to companies.  In fact, according to the CFPB, its consumer complaint portal helps generate broad relief in the marketplace:

How one complaint can help millions

97% of complaints sent to companies get timely responses.

By submitting a complaint, consumers can be heard by financial companies, get help with their own issues, and help others avoid similar ones. Every complaint provides insight into problems that people are experiencing, helping us identify inappropriate practices and allowing us to stop them before they become major issues. The result: better outcomes for consumers, and a better financial marketplace for everyone.

What do class actions accomplish for consumers that is better than this?  Professor Sovern concedes that few putative class members submit settlement claim forms even when they are entitled to payment.  That is a problem that “bedevils class action claims,” he admits.  He also argues that “class actions … deter misconduct in a way that arbitration claims don’t.”  But you don’t need arbitration or class actions to deter alleged misconduct when agencies such as the CFPB are already doing so through their enforcement activities, without charging a hefty attorneys’ fee.  Here, again, the first page of the CFPB’s website states that its enforcement actions have brought more than $11.9 billion in relief to more than 29 million consumers.  And the CFPB maintains a public database of the consumer complaints it receives.  That is also a significant deterrent.

Finally, Professor Sovern criticizes our argument that the number of consumer arbitration filings is attributable in part to the fact that the CFPB has not spent any resources educating consumers about arbitration.  He states, “I am not aware of any evidence that consumers can be usefully educated about arbitration.”  That is a surprising position for a legal educator to take.  Unlike Professor Sovern, we are optimistic that consumers can be “usefully educated about arbitration” and that more education would help consumers recognize the many benefits that arbitration can provide if other means of resolving a dispute are not successful.

The CFPB’s final arbitration rule was the subject of an article by Ballard Spahr partners Alan Kaplinsky and Mark Levin recently published by The Regulatory Review, a publication of the University of Pennsylvania Law School’s Penn Program on Regulation.

The article, The CFPB’s Final Arbitration Rule Run Amok, discusses the final rule’s failure to satisfy the Dodd-Frank Act’s limits on the CFPB’s arbitration rulemaking authority and its promotion of an untethered public policy favoring class action litigation that benefits only class action lawyers.

 

In a press release issued earlier this week, Senator Elizabeth Warren argued that the CFPB’s arbitration rule should not be repealed under the Congressional Review Act because consumers recovered “in only 9 percent of the disputes that arbitrators resolved” and the average award “is only 12 cents for every dollar they claimed.”  Senator Warren attributed those statistics to a “fact sheet” published on August 1, 2017 by the Economic Policy Institute (“EPI”) titled “Correcting the Record — Consumers fare better under class actions than arbitration.”  Unfortunately, these statistics obfuscate the record, rather than correcting it, and create the misimpression that consumers fare very poorly in arbitration compared to class action litigation.  That is not the case.  Let’s look at the math:

  1. In its 2015 study of consumer arbitration, the CFPB examined a total of 1847 consumer financial services arbitrations administered by the American Arbitration Association filed between 2010 and 2012.
  2. For purposes of analyzing substantive arbitration outcomes, the CFPB eliminated cases filed in 2012, leaving a total of 1060 arbitrations filed in 2010-2011.
  3. Of these 1060 arbitrations, 246 arbitrations (23.2%) settled, 362 arbitrations (34.2%) ended in a manner consistent with settlement and 111 arbitrations (10.5%) ended in a manner inconsistent with settlement although it is possible that settlements occurred. The CFPB did not include these “settlement” arbitrations in its analysis of substantive arbitration outcomes because “[t]here are almost no consumer financial arbitrations for which we know the terms of settlement.”  However, there were six credit card arbitrations where the CFPB did know the settlement terms.  One settlement provided for a monetary payment to the consumer, and three settlements provided for an amount of debt forbearance.
  4. In the remaining 341arbitrations, arbitrators made a determination regarding the merits of the parties’ disputes. Of those 341 arbitrations, there were 161 arbitrations in which an arbitrator rendered a decision with respect to a consumer’s affirmative claim against a company.  This means that 180 of the 341 arbitrations involved disputes in which consumers did not assert affirmative claims — i.e., debt collection claims by a company against a consumer.
  5. In three of the 161 arbitrations, CFPB could not determine the results. Of the remaining 158 arbitrations, arbitrators provided some kind of relief in favor of consumers’ affirmative claims in 32 cases (20.3%).  In these 32 cases, the average award to the consumer was about $5,400.
  6. Let’s turn now to the assertion by Senator Warren and EPI that consumers recovered in only “9 percent” of the disputes. No explanation was given for that number, but it apparently was derived by dividing the number of cases in which consumers obtained relief on their affirmative claims (32) by the 341 cases in which the arbitrator made a determination regarding the parties’ disputes. That was Mistake # 1.  180 of the 341 arbitrations were debt collection arbitrations by companies against consumers, so they were not arbitrations in which consumers were even seeking affirmative relief from the company.  Leaving those 180 cases in the equation is mixing apples and oranges.  To compare apples to apples, the 32 cases in which the arbitrator actually provided affirmative relief to consumers should have been divided by the 158 cases in which the consumer was actually seeking affirmative relief.  That percentage is 20.3%, as the CFPB indicated in its study.  So the statement that consumers recovered in only “9 percent” of the disputes is incorrect.
  7. Mistake # 2 was omitting any consideration of the 719 consumer arbitrations that settled or may have settled, according to the CFPB. Just because a case settles does not mean that the consumer did not come away with a monetary payment or some amount of debt forbearance.  In fact, the opposite is likely true — a case settles because the parties found a way to compromise their positions and resolve their dispute.  In fact, as noted above, the CFPB was able to identify six credit card arbitration settlements, and in four of them consumers did receive either a monetary payment or an amount of debt forbearance.  Indeed, all of the CFPB’s statistics on class actions in its arbitration study were derived from class action settlements, since none of the class actions studied by the CFPB actually went to trial.
  8. This means that the data field for measuring consumer success in arbitrations was actually 749 arbitrations — 32 arbitrations in which consumers actually obtained relief on affirmative claims, plus 717 arbitrations that settled (719 minus the two credit card settlements in which consumers did not obtain relief). Therefore, of the 1060 arbitrations filed in 2010-2011, consumers either did or may have come away with a monetary payment or some amount of debt forbearance in as many as 71% of the arbitrations.
  9. Notably, Professor Christopher Drahozal, who served as a Special Advisor to the CFPB in connection with its arbitration study, also conducted a study of more than 300 American Arbitration Association arbitrations in 2009 for the Northwestern University Searle School of Law.  He concluded that consumers won relief in 53.3% of the arbitrations.

With respect to the statement in the press release that the average consumer award “is only 12 cents for every dollar they claimed,” once again no consideration was given to amounts received by consumers in settlement, which certainly would have increased this calculation.   Notably, the CFPB did conclude that in arbitrations in which the consumer asserted an affirmative claim against the company and the arbitrator reached a decision on the merits, consumers recovered 57 cents for every dollar claimed.  The CFPB also concluded that consumers obtained debt forbearance in 19.2% of disputes in which debt forbearance was sought and the arbitrator made a decision.  The average debt forbearance was $4,100, which was 51 cents of each dollar of debt forbearance claimed.  None of these statistics was mentioned in Senator Warren’s press release or the EPI fact sheet.

Another statistic in the press release and fact sheet that bears scrutiny is that when companies bring arbitration claims against consumers, “they win 93 percent of the time.”  While that number is consistent with the CFPB’s findings, it is taken completely out of context.  These claims were debt collection claims by companies in which the consumer either defaulted or had no defenses or very weak ones.  What the press release and fact sheet fail to state is that the result would not have been any different in court.  This precise point was made by the Maine Bureau of Consumer Protection in a 2009 report to the Maine Legislature on consumer arbitrations:

[I]t is important to keep in mind that although credit card banks and assignees prevail in most arbitrations, this fact alone does not necessarily indicate unfairness to consumers.  The fact is that the primary alternative to arbitration (a civil action in court) also most commonly results in judgment for the plaintiff.  Although certainly there are cases in which a consumer has a valid defense to the action, it is also correct to say that most credit card cases result from a valid debt and a subsequent inability of the consumer to pay that debt.

(Emphasis added).  Also, the success rate in debt collections claims by companies is irrelevant to the question of whether class actions are better for consumers than arbitration because such debt claims are completely individualized and not susceptible to class action treatment.   The fact that companies “win 93% of the time” does not support the conclusion that class actions should replace arbitration as the forum for resolving consumer disputes.

By the CFPB’s own calculations, 87% of the class actions studied provided no relief at all to the putative class members, while in the 13% of class actions that settled, the average payment to putative class members was a paltry $32.  The lawyers for the class, by contrast, made a whopping $424,495,451 in attorneys’ fees.  These are not numbers that support the additional 6,042 class actions that the CFPB estimates will be filed over the next five years if the arbitration rule is not repealed.  Nor are they numbers that justify the $2.6 billion to $5.2 billion that companies will have to spend defending them.

Even the CFPB did not find arbitration to be a system rigged against consumers.  If it had found arbitration to be unfair, it would not have allowed companies to continue to engage in individual arbitrations with consumers.   However, very few companies are expected to retain individual arbitration programs if the CFPB rule takes effect.  That is because companies subsidize almost all of the costs of individual arbitrations, and few of them will continue to pay those costs while also spending many billions of dollars defending against the 6,042 new class actions that will be filed against them as a result of the rule.

Senator Warren’s press release states that “consumers rarely pursue individual arbitration.”  But that is because most consumers resolve disputes through the use of companies’ informal dispute resolution procedures and also through on-line complaint portals provided by federal and state agencies including the CFPB itself.  Moreover, although the CFPB has a Consumer Education and Engagement division and virtually unlimited resources, it did not spend a single dollar trying to educate consumers about arbitration.

When all of the relevant numbers and facts are considered, there is only one conclusion — the CFPB arbitration rule must be repealed so that consumers can continue to enjoy the many benefits that arbitration affords them in resolving disputes with companies.  If the rule is repealed, Congress would still be able to issue a regulation supporting the use of arbitration as a vehicle for resolving consumer disputes, if it chose to do so.  For example, such a regulation could require companies using arbitration to provide enhanced disclosures to consumers.  It could also require the CFPB to devote some of its resources to educating consumers about arbitration so that they will be more knowledgeable and better equipped to use it.