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Christmas in July for Plaintiffs Bar—CFPB Arbitration Rule to Take Effect

The Consumer Financial Protection Bureau (CFPB) has issued its final regulation (Rule) limiting the use of mandatory pre-dispute arbitration by providers of covered consumer financial products and services. The Rule will become effective 60 days after publication in the Federal Register (which should occur in the next few days) and will apply to transactions commencing six months after the effective date (roughly April 2018).

The CFPB’s authority does not extend to broker-dealers and other firms regulated by the US Securities and Exchange Commission or US Commodity Futures Trading Commission, or to auto dealers, attorneys, and retailers acting as such, but these entities could be swept back under the ambit of the Rule if they act as service providers to a covered provider or otherwise assist and facilitate such a provider. For example, an auto dealer is exempt from application of the Rule, but to the extent that a dealer directly assists and participates in the auto loan or leasing business on behalf of or in concert with a financial institution, that dealer would likely be covered as to the specific transaction.

The Rule has two critical features:

  1. It prohibits a provider from relying on a pre-dispute arbitration agreement with respect to any aspect of a class action concerning a covered consumer service or product. Thus, a lender could not prevent consumer credit card holders from joining together in what the CFPB’s media outreach euphemistically refers to as “group actions” and then require each individual to proceed alone in an arbitration proceeding.

  2. It requires that covered providers provide certain customer-specific data on arbitrations and ensuing court filings to the CFPB, allowing the CFPB to eventually publicly release data anonymized as to the consumer.

All of this is premised on CFPB research that the agency asserts is supportive of the proposition that consumers fare better in class actions than they do in arbitration. A review of the data on which the CFPB’s study relied, however, suggests that the CFPB did not exclude contingent attorney fees from its calculations. Because these fees are often the lion’s share of the total in class actions (leaving table scraps for most class members), a study that fails to take this factor into account may be of questionable reliability.

This regulatory action, although not unexpected, is a significant victory for contingent fee plaintiffs’ lawyers and, at best, neutral for consumers. It will force easily resolved workaday disputes between businesses and their customers into overcrowded courts where multimillion dollar settlements often result in a pittance for most individual consumers while the lawyers who represent the class take large fees. The class action costs are, of course, part of the operating expenses of the business and ultimately paid as a “litigation tax” in the form of higher prices by consumers who simply wanted a dispute resolved.

But, that is not all. By requiring the filing of otherwise nonpublic arbitration records with the CFPB and eventually making those records public, the CFPB creates a roadmap for plaintiffs’ lawyers. Moreover, in those instances where a business might in the past have found some special merit in a customer’s claim and accordingly recompensed the consumer with a larger-than-usual amount, there will now be a reluctance to remediate for fear of creating a public precedent.


If neither the US president nor US Congress acts, this Rule will become effective unless the courts intervene. Several actions could occur to prevent this Rule from becoming effective:

  1. Congress could, within 60 days, nullify the Rule under its Congressional Review Act (CRA) authority. Although CRA review is not subject to filibuster in the US Senate, it is not certain that the Republicans could muster the necessary majorities to set aside the Rule, given the continued strong anti-Wall Street sentiment among the American electorate.

  2. The president could terminate the CFPB director for cause, or the director could resign on his own accord. A new acting director could be put in place—subject to Vacancies Act restrictions—who could amend or postpone the effectiveness of the Rule, although the Administrative Procedure Act might limit the successor’s ability to act in this manner or might extend the time it takes for the new acting director to proceed.

  3. Congress could amend the CFPB’s authorizing legislation in the Dodd-Frank Act as part of its financial services reform efforts, but substantive and procedural gridlock fanned by partisan rancor in Congress make this route an ever-decreasing possibility.

  4. The Rule almost certainly will be challenged in court, possibly on the ground that the research on which the CFPB director relied in reaching his conclusion (that consumers benefit more through class actions than through arbitration) is faulty. Because the Dodd-Frank Act gave the CFPB the specific authority to promulgate this Rule if it is “in the public interest and for the protection of consumers”—rather than the more demanding standards against unfairness, deception, or abusiveness (UDAAP) the CFPB must normally meet—the avenues for such a challenge are, however, more limited than for the agency’s other rulemakings. Unlike UDAAP, this is not a well-defined standard with judicially developed contours, and courts give Chevron deference to the agency’s assessment of what that standard means.

A court could also rule that the director lacked authority to adopt the Rule. In this regard, there already is a challenge to the constitutionality of the unitary authority of the CFPB director that is now pending in the US Court of Appeals for the DC Circuit. However that court or any other court may rule, the losing party is almost certain to seek further review before the US Supreme Court.

All of these eventualities must be viewed against a political backdrop in which the significant concerns of the business community about the Rule will run up against a federal agency that has substantial support from consumers who are constituents and voters, and who harbor a strong distrust of the financial services sector.

Copyright © 2018 by Morgan, Lewis & Bockius LLP. All Rights Reserved.


About this Author

Nicholas M. Gess, White Collar Attorney, Morgan Lewis Law Firm
Of Counsel

Nicholas M. Gess is of counsel at Morgan Lewis. He served as a member of Attorney General Janet Reno’s senior staff and as an associate deputy attorney general at the U.S. Department of Justice.He brings considerable experience in assessing impending government enforcement and regulatory actions and their impact on the business community. He advises corporate clients how to achieve results with governmental agencies and how to manage the risks of government action, particularly in the current environment where state enforcement authorities combine with congressional...

Charles M. Horn, Morgan Lewis Law Firm, Securities Attorney

Charles M. Horn is a partner in Morgan Lewis's Investment Management and Securities Industry Practice. Mr. Horn focuses his practice on regulatory and transactional matters, primarily in the areas of banking and financial services. He works on behalf of domestic and global financial institutions of all sizes on regulatory, supervisory, enforcement and compliance matters before all major federal financial institutions regulatory agencies, and leading state financial regulatory agencies.


David Monteiro focuses his practice on counseling companies facing government investigations and enforcement litigation. A former enforcement attorney with the Federal Trade Commission’s Bureau of Consumer Protection, Division of Financial Practices, David guides financial institutions and other companies in complying with state and federal consumer protection laws and regulations, responding to examinations and investigations, and defending litigation against the government.

Brian Herman, Morgan Lewis Law Firm, New York, Finance Litigation Attorney

With a focus on financial institutions, Brian A. Herman counsels clients in civil and class action litigation in US state and federal court. He represents banks, broker-dealers, hedge funds, investment advisers, and other complex businesses. Brian also advises clients facing examinations by the US Securities and Exchange Commission (SEC), self-regulatory organizations, state regulators, and other regulatory agencies. Clients also turn to Brian for guidance with internal examinations and enhancing their business practices.

Brian’s practice spans litigation matters...

Robert Bronchin, Morgan Lewis Law Firm, Miami, Commercial Litigation Attorney

Leveraging 30 years of trial experience and a decade of high-level public service in state government, Robert M. Brochin represents corporate clients facing complex commercial litigation and regulatory matters in a wide range of areas, from real estate to financial services. Bobby brings a passion for public law and human rights issues, combined with insights into the business regulatory process, to his practice. He is managing partner of Morgan Lewis’s Miami office.