The Consumer Financial Protection Bureau Is Focusing, Again, on Arbitration Limits

Last week, the Consumer Financial Protection Bureau said it will open for public comments a potential rulemaking that could limit predispute arbitration clauses.

The new rulemaking comes in the wake of a petition by nine consumer groups proposing that the CFPB enact a rule giving consumers in certain financial agreements a right to choose between arbitration and litigation when a dispute arises.

Such a rule would replace the current practice of relying on predispute arbitration clauses, which, as the petition alleged, are used by financial providers to preempt class actions in favor of individual claims.

In response to a Bloomberg Law article on the petition, which was posted by the article’s author, Evan Weinberger, on X, formerly known as Twitter, the CFPB stated:

Americans are overwhelmed by increasingly lengthy, complex, and one-sided fine print in form contracts. The CFPB is focused on companies that use fine print to extract extra money, lock people into unwanted business relationships, gain advantages they could not obtain in fair and competitive markets, or circumvent the rule of law. For example, in January the CFPB proposed to create a public registry of nonbank financial companies that purport to limit consumer rights or protections in form contracts, including arbitration clauses.

We welcome participation in our rulemaking petition program, on the part of the consumer groups who filed this petition or any other members of the public. We are carefully considering the proposal relating to arbitration clauses, and will be opening a public docket and taking comment from the public on the proposal.

The official rulemaking announcement has not been posted on the bureau’s website as of this article’s publication.

The petition and opening for public comment appear to be a re-do of the CFPB’s 2017 efforts to promulgate an Arbitration Agreements rule, which itself was originally authorized under the Dodd-Frank Wall Street Reform and Consumer Protection Act. Under Dodd’s authorization, the CFPB has sought to “prohibit or impose conditions or limitations on the use of an agreement between a covered person and a consumer for a consumer financial product or service providing for arbitration of any future dispute between the parties.”

The 2017 Arbitration Agreements rule would have “prohibited providers from using a predispute arbitration agreement to block consumer class actions in court” and “required providers to insert language into their arbitration agreements reflecting this limitation.” More specifically, the rule required providers to redact and submit to the Bureau certain records relating to arbitral proceedings and relating to the use of predispute arbitration agreements in court and required the Bureau to publish these records on its website. (For a detailed account of the requirements under the 2017 rule, as well as links to the backstory of the fight over the rule’s development, see Nicholas Denny, “Ruling Against Arbitration: Analyzing the CFPB's Class Waiver Regulations,” 35 Alternatives 114 (September 2017) (available at https://bit.ly/46GdZB1).)

Congress overturned the rule when Rep. Keith J. Rothfus, R, Pa., introduced H.J. Res. 111, a joint resolution of disapproval, under the Congressional Review Act (CRA). That resolution was passed by both the House and the Senate, where rule’s CRA removal passed 51-50 in October 2017. The removal authorization was signed into law by President Donald Trump a week after the Senate vote.

The new move at rulemaking comes in the face of the CRA’s prohibition that an agency may not issue a later rule in “substantially the same form” as the one that was overturned unless a new statute authorized such an action. Congressional Research Service, “The Congressional Review Act (CRA): Frequently Asked Questions” (Nov. 12, 2021) (available at https://bit.ly/3EOvTFt). The CRA, however, “does not define what would constitute a rule that is ‘substantially the same’ as a nullified rule.”

Business interests believe that the new petition, and any action that the bureau might take, are an attempted end run around the CRA’s overturning of the first rulemaking. See, e.g., Mark J. Levin & Alan S. Kaplinsky, “Consumer Advocates Petition CFPB to Undertake Rulemaking to Prohibit 'Pre-dispute' Consumer Arbitration Clauses,” Ballard Spahr Consumer Finance Monitor (Sept. 15) (available at https://bit.ly/46lhfBj). 

The petition accounts for the CFPB’s need to produce a different rule and says the new proposal would not be in substantially the same form. It argues that the CRA did not preempt the new rulemaking process, on the basis that while “[t]he CFPB’s 2017 arbitration rule prohibited class action bans in arbitration clauses and required reporting of certain arbitral records,” the new proposal “would not prohibit, or even address, class-action bans.” The new proposal “would give consumers the right to make the choice about dispute resolution after a dispute arises, thereby ensuring that consumers can make informed, meaningful choices at the most relevant time.”

Despite this assertion, the target and goal of the proposed rule is the same as the 2017 Arbitration Agreement rule, opponents say. Not only is the new proposal predicated upon the same 2015 CFPB study of consumer arbitration clauses as the 2017 proposal, but the issue in need of redress it identifies is the same, i.e., the predispute nature of consumer financial arbitration clauses.

Since no new legislation authorizing rulemaking has been enacted since 2017, whether the new rule would survive challenges to its validity is questionable. And depending on the makeup of Congress, a successfully promulgated rule could again face a Congressional Review Act vote and reversal. 

When the CRA move to overturn the 2017 CFPB rulemaking was pending in Congress, the Trump Administration piled on. At that time, as a matter of policy, the U.S. Treasury Department noted that the rule “would upend a century of federal policy favoring freedom of contract to provide for low-cost dispute resolution.” Soon after the report, President Trump signed the bill overturning the rulemaking into law. 

The composition of the House and Senate have changed since 2017, with the Senate now under Democratic control, while the House has a Republican majority. So, if Republicans again try to disapprove of a fast-track rule proposed by the CFPB before the 2024 elections, it would be unlikely to make it through the Senate. A change in control next year could see a new Republican Congressional Review Act proposal down the road. 

Furthermore, the agency's existence is in question. On the opening day of the 2023-2024 U.S. Supreme Court term next Tuesday, the nation’s top Court will hear arguments over the constitutionality of the agency’s funding. See the Court’s docket on Consumer Fin. Protection Bureau, et al. v. Community Fin. Svcs. Ass’n of Am. Ltd., et al., No. 22-448, at https://bit.ly/3Lzs9f8. 

The consumer advocacy organizations signing onto the new petition are all longtime opponents of mandatory predispute arbitration agreements. They are the National Association of Consumer Advocates, Public Citizen, the American Association for Justice, Public Justice, the National Consumer Law Center, the Consumer Federation of America, the UC Berkeley Center for Consumer Law & Economic Justice, Americans for Financial Reform, and Better Markets, Inc.

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The author, a second-year law student at the Northeastern University School of Law in Boston, is a Fall 2023 CPR intern.

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