On September 29, 2017, the United States Chamber of Commerce and various business and financial services groups (collectively, Plaintiffs) filed a complaint for declaratory and injunctive relief in the United States District Court for the Northern District of Texas, alleging that—for four independent reasons—the Consumer Financial Protection Bureau’s (CFPB) recently-issued rule concerning mandatory arbitration clauses (the Rule or the Arbitration Rule) is both unconstitutional and illegal. See Complaint for Declaratory & Injunctive Relief, U.S. Chamber of Commerce v. CFPB, No. 3:17-cv-02670-D (N.D. Tex. Sept. 29, 2017).
The Arbitration Rule contested by the Plaintiffs was issued earlier this year on July 10, 2017 and was published in the Federal Register on July 19, 2017. The language of the Rule provides a detailed list of the types of companies subject to the Rule, as well as a list of companies exempted from the Rule—but generally, the Rule “applies to providers of certain consumer financial products and services in the core consumer financial markets of lending money, storing money, and moving or exchanging money.”
As LenderLaw Watch previously reported, Rule had two primary consequences. First, although companies subject to the Rule may continue to use mandatory arbitration clauses, such clauses can no longer bar individuals from taking part in group lawsuits. Second, the Rule aimed to improve the CFPB’s ability to oversee the use of arbitration clauses in consumer financial markets by requiring companies to provide the CFPB with information related to their arbitration proceedings, including correspondence reflecting companies’ failure to follow arbitration standards of fairness. The Rule became effective on September 18, 2017 and applies to contracts entered into on or after March 19, 2018.
The CFPB issued the Rule after conducting a study on the use of mandatory arbitration clauses in consumer financial markets, the results of which were released in March of 2015. Although mandatory arbitration provisions can be drafted to prevent any type of lawsuit, the CFPB observed that companies were almost exclusively using them to block class action lawsuits. According to the results of the study, the CFPB found that mandatory arbitration clauses were both common and harmful; “credit card issuers representing more than half of all credit card debt and banks representing 44 percent of insured deposits used mandatory arbitration clauses,” yet “three out of four consumers the [CFPB] surveyed did not know whether their credit card agreement had an arbitration clause.”
According to the CFPB, the study revealed that the harms associated with mandatory arbitration clauses included the fact that these provisions overwhelmingly denied consumers their day in court. The report asserted that, because the damages for individual cases in the consumer financial services field tend to be low, it is typically economically infeasible for individuals to bring individual actions against their financial services providers. The use of mandatory arbitration clauses to bar class actions, then, has had the result of largely barring individuals from accessing relief. The CFPB observed that “[o]nly about 2 percent of consumers with credit cards surveyed said they would consult an attorney or consider formal legal action to resolve a small-dollar dispute.” Other harms identified by the CFPB included that these clauses allowed bad actors to avoid paying large damages (e.g., the study suggested that combined arbitration awards were significantly lower than awards associated with group lawsuits) and to avoid changing their behaviors (as resolutions of class actions frequently require companies to change their conduct).
Plaintiffs in U.S. Chamber of Commerce v. CFPB now allege that the Arbitration Rule is unconstitutional and illegal for the following four reasons: first, Plaintiffs allege that the Rule is “fatally infected” by the CFPB’s allegedly unconstitutional structure; second, Plaintiffs allege that “the Rule violates the Administrative Procedures Act . . . because the CFPB failed to observe procedures required by law when it a adopted the conclusions of a deeply flawed study”; third, Plaintiffs allege that “the Rule also violates the [Administrative Procedures Act] for the related reason that it runs counter to the record before the [CFPB] and fails to take account of important aspects of the problem it purports to address,” rendering it arbitrary and capricious; and fourth, Plaintiffs allege that the Rule “fails to advance either the public interest or consumer welfare” in violation of the Dodd-Frank Wall Street Reform and Consumer Protection Act because “it precludes the use of a dispute resolution mechanism that generally benefits consumers”—arbitration—“in favor of one that typically does not,” class action litigation.
Given the broad use of mandatory arbitration provisions in the consumer financial services industry and the significantly increased damages at stake in class action litigation, industry members should follow legal challenges like U.S. Chamber of Commerce v. CFPB closely. LenderLaw Watch will bring you updates on this case as they develop.