From the day the Consumer Financial Protection Bureau moved to ban contract language prohibiting class action waivers, business groups led by the U.S. Chamber of Commerce prepared to write the obituary for mandatory arbitration.
The consumer agency’s proposal, business advocates argued, would eliminate for customers a faster, less costly forum for conflict resolution. But the CFPB and its allies, pointing to a study that Congress commissioned when it created the agency in 2010, said forced arbitration shuts out millions of consumers from the courts, essentially silencing customers who would otherwise bring claims.
The CFPB’s proposal has generated thousands of comments, many from opponents who argue the ban would only benefit trial lawyers. Insurance regulators have expressed their own concerns. Hundreds of law professors are backing the consumer agency’s proposed rule. U.S. lawmakers are divided.
Two of the heavy-hitters in the debate — the U.S. Chamber of Commerce and, on the other side, consumer advocacy group Public Citizen — plan to submit their positions Monday, when the comment period closes.
“The bureau’s proposed rule would effectively eliminate arbitration. Even though the bureau claims not to be prohibiting arbitration agreements entirely, companies will not maintain dual systems of dispute resolution, as the proposed rule would require,” the Chamber wrote in its comment.
Here are some highlights from the comments filed thus far.
Concern about overlapping regulations
Broker-dealers have drawn distinction between investment contracts and consumer financial contracts — and they’re telling the CFPB to leave the regulation of their industry to the U.S. Securities and Exchange Commission. A trade group, the Securities Industry and Financial Markets Association, commented on July 1 that Congress did not intend in the Dodd-Frank reform law to give the CFPB and the SEC overlapping authority.
“We question the necessity and appropriateness of the CFPB extending the proposed rule to SEC-regulated entities, based upon clear congressional intent, the explicit statutory language of the Dodd-Frank Act, and sound policy and practical considerations,” wrote Kevin Carroll, the group’s managing director and associate general counsel.
“In short, we believe that the CFPB should defer regulation of arbitration generally, and arbitration clauses specifically, for SEC-regulated entities to the SEC,” Carroll wrote. “Thus, the proposed exemption for broker-dealers in the proposal, and any prospective exemption for investment advisers, are unnecessary.”
State Attorneys General
On Aug. 11, a group of 19 state attorneys general—under the masthead of Massachusetts Attorney General Maura Healey — wrote that class action lawsuits complement their enforcement efforts.
The group, which included California attorney general and U.S. Senate candidate Kamala Harris, highlighted a 2010 decision that forced Wells Fargo to pay $203 million in restitution for overdraft policies designed to maximize fees. The decision had the dual effect of compensating customers and changing business practices.
“This decision had ripple effects throughout the banking industry,” the state attorneys general wrote.
Rather than expedite the resolutions of claims, the attorneys general added, forced arbitration has steered consumers away from bringing disputes to begin with. The U.S. Supreme Court decision inAT&T Mobility v. Concepcion “has resulted—foreseeably—in consumers simply foregoing their rights to pursue claims for small amounts under financial services contracts,” they wrote.
Insurance regulators weigh in
In the text of the proposal, the CFPB inserted language that carved out the “business of insurance” from the activities subject to the ban on forced arbitration clauses.
State insurance regulators said in an Aug. 4 comment that they “appreciate that the bureau appears to be attempting to separate out the ‘business of insurance’ from the scope of the rule.” Still, the National Association of Insurance Commissioners asked the CFPB to specify that the arbitration rule does not extend to life insurance policy loans.
“We believe state law remains the appropriate vehicle for any such restrictions related to the business of insurance,” wrote the National Association of Insurance Commissioners leadership, including the top insurance regulators of Missouri, Wisconsin, Tennessee and Maine.
“It is our view that policy loans made under whole life insurance contracts are governed by the terms of the contract, which is ultimately the ‘business of insurance,’” they added. “We respectfully encourage you to remove extensions of credit by providers of whole life insurance policies from the scope of the rule.”
Law professors express approval
The same week the comment period opened, a group of more than 200 law professors and other scholars quickly applauded the proposal as “critically important to protect consumers.” Among other consumer law experts, the roster of signatories included Georgetown University Law Center professor David Vladeck, a former director of the Federal Trade Commission’s Bureau of Consumer Protection.
By allowing financial-services companies to “eradicate consumer class actions,” the professors wrote, “we are allowing these companies to insulate themselves from enforcement of our laws. This harms not only individual consumers but also the public at large.”
The professors added that the mere possibility of facing a class-action lawsuit would have a deterrent effect.
“Companies engage in risk management calculations and are less likely to risk violating consumer laws if they know they may be sued in class actions for such violations,” the professors wrote.
On Aug. 12, Yale Law School professor Judith Resnik joined in the chorus of legal scholars backing the proposal. Resnik pointed to her research of arbitration complaints brought against cellphone companies such as AT&T Mobility LLC, which in 2011 won a Supreme Court decision that bolstered businesses’ use of class-action waivers. In a letter addressed to Richard Cordray, director of the CFPB, Resnik noted the Supreme Court has viewed arbitration clauses as enforceable contracts.
“But the clauses in consumer services and on job application forms do not merit the term ‘contract,’” Resnik wrote. “They are neither bargained for nor bargainable.”
U.S. lawmakers divided
Before the comment period began, House GOP lawmakers slammed the CFPB rule in a hearing of the financial institutions and consumer credit subcommittee. The committee’s chairman, U.S. Rep. Randy Neugebauer, R-Texas, said arbitration brings “efficient, expedited” relief to consumers and should be preserved.
“In my view, the proposed rule is a clear error in judgment by the bureau,” Neugebauer said, adding that the elimination of arbitration would “perpetuate a justice gap.” That outcome, he said, “would certainly not be for the protection of consumers.”
Across the aisle, House and Senate Democrats said they support the proposal. Drawing heavily from the arbitration study that Congress commissioned when it created the CFPB as part of the Dodd-Frank financial reform law, senators including Minority Leader Harry Reid, D-Nevada, call class actions a critical tool for consumers to change bad business behavior. Class actions, Democratic lawmakers contend, can vindicate consumer-rights “by returning billions of dollars to millions of consumers.”
“As the CFPB has demonstrated with its comprehensive study, forced arbitration shields corporations from accountability for abusive, anti-consumer practices, which only encourages unscrupulous business practices by allowing violations of the law to go unchecked,” wrote 38 senators, including Sen. Patrick Leahy of Vermont, the ranking member on the Judiciary Committee. “This comes at the expense of consumers, small businesses, and — just as importantly — law abiding businesses.”
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