On July 19, 2017, the Consumer Financial Protection Bureau (“CFPB”) published a new rule that has the potential to significantly increase the number of class action lawsuits brought by consumers against their financial services providers. Although consumer advocates applaud the rule, critics argue that the rule will lead to an explosion of frivolous lawsuits. Congress, for its part, is currently taking steps to stop the rule from ever taking effect.
The rule would no longer allow a financial services provider to use mandatory arbitration clauses to stop its consumers from bringing class action lawsuits against that provider. Mandatory arbitration clauses require that disputes between parties to a contract must be resolved by privately appointed arbitrators rather than the courts, with few exceptions. According to the CFPB, financial services providers have used arbitration clauses in consumer contracts to block class action lawsuits, forcing each consumer to pursue individual claims. A CFPB study from March 2015 further claims that mandatory arbitration clauses are harmful to consumers because companies avoid paying full relief to all those harmed and are therefore not sufficiently deterred from engaging in the misconduct moving forward.
On July 25, 2017, the U.S. House of Representatives voted overwhelmingly to overhaul the CFPB rule by invoking the Congressional Review Act (“CRA”), which gives Congress the authority to repeal newly enacted rules and regulations. This resolution is now scheduled to go before the Senate, where if approved, would only need the President’s signature to be ratified. The rule’s likelihood for survival appears slim since under the CRA, the Senate needs only a simple majority to approve the House resolution. Perhaps the most serious obstacle to the repeal is logistics—the Senate calendar is currently full with other high-profile matters, and the Senate may not get a chance to vote on the rule.
The Rule’s Effects
Should the rule survive, it would have serious consequences on the financial services industry. The rule would be far-reaching and apply to a large number of companies overseen by the CFPB that are “in the core consumer financial markets of lending money, storing money, and moving or exchanging money.” Some of the financial services providers subject to the rule include those engaged in:
- Extending, acquiring, or selling consumer credit;
- Extending or brokering automobile leases;
- Providing debt management or settlement services;
- Providing directly to a consumer a consumer report or credit score;
- Providing accounts and remittance transfers;
- Transmitting or exchanging funds; and
- Check cashing or collection.
Although the rule’s path towards survival is ultimately unlikely (in light of recent Congressional action), its significant potential impact on the financial services industry is deserving of deliberation. Considering the added avenue for recourse available to consumers under the rule, and its reach in terms of applicability to the financial services industry, the rule would likely lead to an increase in consumer class actions if it takes full effect. Consequently, financial services providers have much to lose, and should stay up-to-date on any developments as the rule makes its way through the Senate, and to potentially the White House, in the coming weeks.