A coalition of financial services industry trade associations recently filed a lawsuit challenging the CFPB’s new rule which prohibits companies from using pre-dispute arbitration clauses that require consumers to waive their ability to bring or participate in class actions. The suit, filed in the U.S. District Court for the Northern District of Texas, challenges the arbitration rule on constitutional and statutory grounds.
The associations assert four overarching arguments in their Complaint. First, the associations assert that the CFPB’s single-director structure—which only allows the director of the agency to be removed for cause—is an unconstitutional infringement on the President’s powers. In turn, they claim that the arbitration rule is invalid since it is a product of this unconstitutional structure. This issue—the constitutionality of the CFPB’s single director structure—is currently before the U.S. Court of Appeals for the D.C. Circuit en banc in a separate, unrelated case (see HERE).
Second, the associations contend that the arbitration rule violates the Administrative Procedures Act (APA) because the CFPB failed to observe required procedures when it adopted the conclusions of a flawed study. As background, the arbitration rule is primarily based on the results of a study concerning the use of mandatory arbitration provisions. The Dodd-Frank Act required the CFPB to conduct this study before developing any rule affecting the use of mandatory arbitration agreements. In the study, the CFPB concluded that these provisions generally preclude the use of class actions in consumer financial services disputes, and that class actions provided a better route to dispute resolution over individual arbitration. The associations assert that the study misstated or disregarded key data, and reached invalid conclusions that understate the effectiveness of arbitration and overstate the value of class actions.
Third, the associations claim that the rule is arbitrary and capricious under the APA. They assert that the CFPB failed to address key considerations, such as (1) whether eliminating arbitration in financial services contracts would injure consumers and (2) that the Rule is based on conclusions that are contrary to the administrative record. According to the associations, the administrative record establishes that arbitration is effective in providing relief to consumers and that class action litigation often is not.
Finally, the associations argue that the rule is contrary to the Dodd-Frank Act because (1) it is not in the public interest and (2) does not protect consumers. They assert that arbitration provides the most practical avenue for consumers to obtain relief for the types of individualized claims that consumers typically consider most important, and that class actions generally result in substantial rewards to class action lawyers but rarely provide meaningful relief for individual consumers.
While not discussed in the Complaint, the associations’ case is bolstered in part by a report recently issued by the Office of the Comptroller of the Currency (OCC), which found that the CFPB’s new arbitration rule could harm consumers. Specifically, the arbitration rule would result in greater costs and liabilities for financial services companies due to an increase in class action litigation, and that these amounts would be passed onto consumers through the prices consumers pay for financial goods and services. The OCC calculated that the arbitration rule would increase the expected cost of credit by 3.43%, and determined that this amount is economically significant.
The case is Chamber of Commerce of the U.S. v. CFPB, No. 3:17-cv-2670 (N.D. Tex.) and a copy of the Complaint is available HERE.
See our prior analysis of the CFPB’s new arbitration rule HERE.