The CFPB has issued its fifth Financial Literacy Annual Report to Congress.  The report describes the CFPB’s ongoing financial literacy work, “with an emphasis on work during October 2016 through September 2017.”  It covers the CFPB’s financial literacy strategy, its financial education initiatives generally and those specifically targeted at students and young adults, servicemembers, economically vulnerable individuals, and older adults, and its research initiatives.

An Appendix to the report provides a list and brief descriptions of the CFPB’s currently available financial education resources, which include web-based resources and tools, CFPB brochures, CFPB reports and white papers, and consumer advisories.

We have previously commented that the CFPB has not devoted any resources to educating consumers about arbitration.  Congress’ override of the CFPB’s arbitration rule means that 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.  Since many financial services companies can be expected to continue to use arbitration agreements, a strong need remains for consumers to be educated about arbitration.

In a blog post last week, we noted that there had been no official statement from the CFPB about Congress’ override of the CFPB’s arbitration rule, which President Trump signed on November 1.

Since publishing our blog post, we learned that Director Cordray had issued a statement on November 1 in which he criticized the override.  Director Cordray’s statement was not published on the CFPB’s website and it appears the statement was only sent to media members.  There continues to be no indication of the CRA override on the CFPB’s website.

As we previously commented, we assume the CFPB will be publishing a notice in the Federal Register that references the CRA override and removes the arbitration rule from the Code of Federal Regulations.  However, if the CFPB is planning to wait until it publishes such a notice before removing the rule from its website, we hope it will update its website in the meanwhile to note the CRA override.

On November 29, 2017, from 12 p.m. to 1 p.m. ET, Ballard Spahr attorneys will hold a webinar, “Now that the CFPB’s Arbitration Rule is Dead, How Should the Industry React?”  For more information and to register, click here.

Today will mark one week since President Trump signed H.J. Res. 111, the joint resolution passed by the House and Senate disapproving the CFPB arbitration rule.

Since that time, there has been no official statement from the CFPB about the override of the arbitration rule.  The arbitration rule was not mentioned in Director Cordray’s remarks to the CFPB’s Consumer Advisory Board at its November 2 meeting.

The arbitration rule became effective on September 18, 2017, with a March 19, 2018, mandatory compliance date.  Under the, Congressional Review Act, enactment of a resolution of disapproval blocks a rule from taking effect or continuing.  Accordingly, the signing of the joint resolution by President Trump means the CFPB arbitration rule became ineffective as of November 1.

Other agencies whose rules were disapproved under the CRA earlier this year have published notices in the Federal Register that reference the CRA overrides and remove the disapproved rules from the Code of Federal Regulations.  We assume the CFPB will publish a similar notice removing the arbitration rule from the Code of Federal Regulations.

As of today, however, the final arbitration rule, with its effective and mandatory compliance dates, continues to be posted on the CFPB’s website with no indication of the CRA override.  If the CFPB is planning to wait until its notice is published before removing the rule from its website, it should at least update the website in the meanwhile to note the CRA override.

On November 29, 2017, from 12 p.m. to 1 p.m. ET, Ballard Spahr attorneys will hold a webinar, “Now that the CFPB’s Arbitration Rule is Dead, How Should the Industry React?”   For more information and a link to register, click here.

 

The plaintiffs in the lawsuit filed by industry groups in a Texas federal district court against the CFPB to overturn the final arbitration rule have filed a Notice of Voluntary Dismissal.

Yesterday, President Trump signed H.J. Res. 111, the joint resolution passed by the House and Senate disapproving the CFPB arbitration rule.  In their notice, the plaintiffs cited to the language in the Congressional Review Act that provides that the enactment of a joint resolution of disapproval blocks a rule from taking effect or continuing in effect.  The arbitration rule became effective on September 18, 2017, with a March 19, 2018, mandatory compliance date.  The plaintiffs stated that “[b]ecause the [CFPB] rule has been invalidated pursuant to the Act, and therefore has no continuing effect, Plaintiffs hereby voluntarily dismiss this action without prejudice.”

The case docket indicates that the case has been terminated pursuant to the plaintiffs’ notice.

Today, President Trump signed H.J. Res. 111, the joint resolution passed by the House and Senate disapproving the CFPB arbitration rule.

The House and Senate actions were taken pursuant to the Congressional Review Act (CRA), which establishes a fast-track procedure under which Congress can override a federal agency’s final rule by passing a resolution of disapproval that cannot be filibustered in the Senate and only requires a simple majority vote.

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.  Accordingly, the signing of the joint resolution by President Trump means the CFPB arbitration rule is no longer effective.

The CRA also provides that enactment of a resolution of disapproval prevents an agency from reissuing the disapproved rule in substantially the same form or from issuing a new rule that is substantially the same, unless the reissued or new rule is specifically authorized by a law enacted after the date of the resolution of disapproval.  Thus, without new authority from Congress, the CFPB cannot reissue the arbitration rule with substantially similar prohibitions and requirements for companies using arbitration agreements or issue a new rule containing substantially similar prohibitions and requirements.

Acting Comptroller of the Currency Keith Noreika issued a statement in which he applauded the President and Congress for vacating the CFPB rule.  He called the override “a victory for consumers and small and midsize banks across the country because it stops a rule that likely would have significantly increased the cost of credit for hardworking Americans and taken away a valuable tool for resolving differences among banks and their customers.”

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 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.