Congress Kills the CFPB Arbitration Rule

In a great victory for motor vehicle dealers, Congress passed, and the President has signed, a resolution invalidating the CFPB’s regulation on predispute arbitration.

Charapp & Weiss represented a group of state and metro dealer trade associations in opposing the CFPB rule.  We have written about it on several occasions.  While the regulation would not have affected franchised dealers directly because they are exempt from CFPB jurisdiction, it threatened to be ruinous indirectly.  The regulation prevented finance sources from depending on class action waivers in arbitration provisions.  Dealers were justifiably concerned that finance sources facing millions in legal exposure in class actions would try to impose the liability on dealers through indemnification provisions in indirect finance agreements.   

Under the Congressional Review Act, a regulation may be invalidated with a majority vote by both houses of Congress.  The House of Representatives voted this summer to use the CRA to invalidate the CFPB Arbitration Rule. The Senate passed the resolution in October with a vote of 51-50, with Vice President Pence casting the tie-breaking vote.  As early as the morning of the vote, there was significant question whether Republicans could round up enough votes to pass the measure.  What changed?   The release of the Treasury Department’s October 23, 2017 report titled “Limiting Consumer Choice, Expanding Costly Litigation: An Analysis of the CFPB Arbitration Rule”.  Some observers believe that the Treasury Department’s Report that was highly critical of the CFPB Rule provided coverage certain Senators needed to support the resolution.   

The Treasury Department’s Report found:

  • “… the Bureau failed to meaningfully evaluate whether prohibiting mandatory arbitration clauses in consumer financial contracts would serve either consumer protection or the public interest—its two statutory mandates. Neither the Study nor the Rule makes that requisite showing.”
  • Since the CFPB estimated that 3,000 additional class action lawsuits will be brought in the next five years, it will cost $500 million in additional legal defense fees, $330 million in payments to plaintiffs’ lawyers, and $1.7 billion in additional settlements.
  • The affected financial burdens of the businesses will be passed on to the consumers.
  • In 87% of class action cases, either no plaintiffs or only named plaintiffs receive relief, which equates to, of the 3,000 additional CFPB estimated civil cases, 4 out of 5 cases will yield no recovery for consumers.
  • Plaintiff’s attorneys were the true beneficiary of the rule – “…plaintiff- side attorneys’ fees account for approximately 31% of the payments that plaintiffs receive from class action settlements—and in many types of cases, much more. In an average case, plaintiffs’ attorneys collect more than $1 million; actual plaintiffs receive $32 each.”
  • The Rule failed to address the significant costs assessed due to the increased litigation, the potential recoveries of the actual plaintiffs, and costs imposed by class actions that lack merit.
  • The Rule failed to adequately provide a cost-benefit analysis – “The Bureau’s Rule would upend a century of federal policy favoring freedom of contract to provide for low-cost dispute resolution. An agency implementing such a drastic shift in policy should typically subject its rulemaking to the rigors of cost-benefit analysis and require incremental efficiency justification for more stringent regulations.”

Congressional action permits dealers and their finance sources to continue to rely on alternative dispute processes to protect against ruinous class actions that benefit plaintiffs’ attorneys.