A group of 18 business-advocacy organizations led by the U.S. Chamber of Commerce and American Bankers Association have filed suit in the U.S. district court in Dallas, Texas, in an effort to prevent the Consumer Financial Protection Bureau’s arbitration regulation from taking effect. The regulation will prevent the enforcement of pre-dispute arbitration clauses in consumer contracts if those clauses ban class actions. According to the complaint, the regulation is unconstitutional and illegal because:
- The CFPB’s organization is unconstitutional.
- The Bureau did not follow procedures required by the Administrative Procedures Act when it adopted the regulation.
- The regulation violates the APA because it is arbitrary and capricious.
- The regulation violates the Dodd-Frank Act because it does not advance the interest of either consumers or the public.
The complaint, which also requests that the regulation be stayed until judicial review is completed, was filed in Chamber of Commerce v. CFPB.
Arbitration regulation. The CFPB’s July 10, 2017, final rule on arbitration agreements applies broadly across the consumer financial services industry, covering not only lenders but also companies such as vehicle lessors, debt management and credit repair service providers, credit reporting agencies, and debt collectors (see Banking and Finance Law Daily, July 10, 2017). In addition to restricting the use of predispute arbitration agreements, it imposes disclosure duties and recordkeeping and reporting requirements.
It is scheduled to take effect in 2018.
Constitutionality. The complaint’s attack on the Bureau’s structure raises no new arguments. It claims that the Bureau’s structure, comprising a single director who can be removed by the President only for cause, violates the Constitution’s separation of powers requirements and interferes with the President’s authority. These issues currently are being raised in a number of other suits. Most notably, arguments have been held in the U.S. Court of Appeals for the District of Columbia Circuit in PHH Corp. v. CFPB.
APA procedures. The Dodd-Frank Act required the Bureau to carry out a study before adopting any arbitration rule, the complaint points out. However, the Bureau’s study "was fundamentally flawed by methodological errors; misinterpreted or disregarded relevant information; and failed to consider key issues that bear on the inquiry," the organizations allege. The organizations assert that the study was unfair because it understated the value to consumers of arbitration and overstated the value of class actions. The conclusion that arbitration does not result in lower prices for consumers also was unsupported.
As a result, the CFPB did not properly consider the costs and benefits either to consumers or to service providers, the complaint says.
Arbitrary and capricious. The same defects in the study that violated the APA’s procedural requirements make the resulting regulation arbitrary and capricious, the complaint continues. The organizations allege that the evidence actually shows that arbitration is at least as fair to consumers as litigation while being more efficient and more easily available.
On the other hand, the Bureau "vastly overstated the fairness, timeliness, and value of class-action litigation to consumers, and it downplayed the harms of widespread class-action litigation to businesses and the economy generally," the organizations claim.
The CFPB did not consider any alternatives to the total class-action ban, the complaint adds.
Dodd-Frank Act. The Dodd-Frank Act authorizes the Bureau to adopt restrictions on arbitration only if they are "in the public interest and for the protection of consumers," the complaint observes. The evidence about the benefits to consumers of arbitration make clear that the Bureau’s regulation fails that test, the organizations assert.
Most consumer claims turn on individual, specific factual situations that are not amenable to class action treatment, the organizations claim. Litigating such claims would be prohibitively expensive, so if the claims cannot be pursued through arbitration they cannot be pursued at all. The Bureau has cited "no corresponding public benefits" of the rule, the complaint asserts.
The case is No. 3:17-cv-02670-D.
Companies: American Bankers Association; Consumer Bankers Association; Financial Services Roundtable; U.S. Chamber of Commerce
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