By Russ Bleemer

The broadest move by a government agency so far to restrict arbitration has been unveiled by the Consumer Financial Protection Bureau—a long-expected ban on the use of class-action waivers that require mandatory arbitration in consumer financial contracts.

While arbitration itself wasn’t the direct target, the practice has taken a public relations hit, becoming a proxy in a war over class-action processes.

Under the CFPB’s final rule—it proposed the ban last year under the Obama Administration after researching the subject since 2012—financial services firms, including those providing bank accounts and credit agreements, would be prohibited from using contracts that prevent consumers from joining together in class-action suits in court and require, instead, individualized arbitration processes.

Arbitration, the CFPB emphasized, would not be banned.

But it will be subject to unprecedented regulation.  Companies would have to note in their consumer credit agreements that the arbitration process being offered does not prevent the individual from initiating or joining a class-action suit.

And the companies using arbitration would have to provide the results of those processes to the CFPB, which on Monday announced it would post those cases, after redacting identifying information, on its website beginning in July 2019.

The rule, according to CFPB Director Richard Cordray, “prevents financial companies from using mandatory arbitration clauses to deny groups of consumers their day in court.”

Still, it may never get to the marketplace.  The rule, the CFPB said Monday, will be sent to the Federal Register for publishing, expected in the next week or two.  There is a total of 241 days needed for compliance before the rule is fully effective—the CFPB said it would announce an exact date upon publication.

In the interim, the Republican Congress may move to revoke it.  The 2017 Congress has embraced the Congressional Review Act, a formerly little-used 1996 law that allows it to review new federal regulations issued by government agencies and overrule them under a joint resolution.

This year, the CRA has been invoked 14 times to overturn regulations. The CFPB’s arbitration efforts have been squarely in the sights of banking and finance lobbyists, among others.

There are other options, including President Trump firing Cordray and replacing him with a director who would strike the CFPB proposal.  See Alan S. Kaplinsky, “Proposed CFPB Arbitration Rule Faces Multiple Obstacles,” 35 Alternatives 3 (January 2017)(available at http://bit.ly/2hRb943).

And H.R. 10, the Financial CHOICE Act of 2017, an April proposal by Rep. Jeb Hensarling, R., Texas, would repeal the CFPB’s authority to restrict arbitration.  The bill passed the House and has been referred to the Senate Committee on Banking, Housing, and Urban Affairs.

Late last month, the Trump Administration reversed course on mandatory employment arbitration contracts, switching sides in three consolidated U.S. Supreme Court cases to be argued this fall in which the National Labor Relations Board similarly had banned the use of arbitration clauses because they prevent class cases against employers.  See Nicholas Denny, “DOJ to NLRB: You’re On Your Own in the Supreme Court,” CPR Speaks (June 21)(available at http://bit.ly/2uJNDwC).

Said Cordray, “I am aware, of course, of those parties who have indicated they will seek to have the Congress nullify the new rule.” He said that such steps will be “determined on the merits.” He continued: “My obligation as the [CFPB director] is to act for the protection of consumers and in the public interest, [and] that is what I believe have done” with the release of the final class waiver-arbitration rule.

The CFPB’s press announcement, along with links to the rule’s text and a new video explaining the moves, can be found HERE.

Russ Bleemer is the editor of CPR’s award-winning magazine, Alternatives.