Will CFPB's ban on arbitration clauses stand?


The Consumer Financial Protection Bureau's new arbitration rule, which drew immediate criticism from automotive and lending associations and praise from consumer advocacy groups, may never take effect. But it's also unlikely to disappear immediately, experts said.

The rule prohibits banks and other financial services companies from including mandatory arbitration clauses in contracts, including indirect auto loans. Doing so effectively bars consumers from pursuing claims of wrongdoing via class-action lawsuits by forcing consumers to seek relief through individual arbitration cases.

Critics cited a Consumer Financial Protection Bureau study that found arbitration provides more relief to consumers than class-action suits. Those favoring the rule said class-action suits are a greater deterrent to bad corporate behavior.

The rule could put dealerships and auto lenders at risk for class-action lawsuits, but it faces roadblocks, said Randy Henrick, an attorney specializing in consumer-protection and dealership law.

"The rule was so absolute and sweeping that it invites challenges on multiple fronts," he said. "I don't believe this will see the light of day."

But even critics of the rule said getting it overturned or rolled back likely won't happen immediately, unless Congress jumps in. Even if the bureau's director, Richard Cordray, is fired or resigns before his term ends next year, there must be a notice and comment period to roll back a rule, said Michael Benoit, chairman at the Hudson Cook law firm. A new director appointed by Republicans couldn't immediately reverse it, he said.

What could Congress do? Henrick cited the Congressional Review Act. Within 60 legislative days of the rule's publication in the Federal Register, Congress can introduce a joint resolution to disapprove the rule through an expedited process. If Congress strikes down the rule and the president agrees, the rule is void and the agency is prohibited from enacting a similar rule unless authorized by Congress.

Benoit said dealers, finance companies and trade associations "need to mobilize and really bang on Congress to use their authority to overturn it."

Benoit said consumer advocates likely expect Republicans will hesitate to overturn the rule and put themselves in electoral jeopardy, in part because the bureau uncovered financial scandals such as Wells Fargo's opening unauthorized bank and credit card accounts in 2011-15. But he notes that many House Republicans are in relatively safe seats.

"Those who are in questionable seats, does it become a factor in the re-election campaign? Sure, but a major factor? Probably not, because there are plenty of other things to harp on, like health care and tax reform," he said. "For a Congress that has had a very difficult time getting anything done, this is something they could do with 51 votes in the Senate."


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