I am often asked whether I think that the CFPB will issue a reg banning the use of arbitration in consumer financial services contracts. Elizabeth Warren made clear her negative views of arbitration. And, the hiring of Deepak Gupta (the plaintiff’s attorney in AT&T Mobility LLC v. Concepcion) by the CFPB’s Office of General Counsel certainly raises additional concerns. One consumer advocate last week posted an unusually candid view of what the CFPB should do “For CFPB on Opening Day: Study It (Forced Arbitration), then Ban it.” While that may represent the sentiments of consumer advocacy groups and plaintiffs’ class action lawyers, that is not what Congress mandated.
Section 1028 of Dodd-Frank requires the CFPB to conduct a study of pre-dispute arbitration provisions in consumer financial services contracts, to report to Congress and, if supported by the results of the study, prohibit or regulate such provisions. The CFPB study must find that such a prohibition or regulation “is in the public interest” and for the “protection of consumers” in order for it to act. The following factors suggest that this will not be a high priority at the CFPB:
- There is no deadline for conducting the study. Congress imposed deadlines for other CFPB studies.
- The CFPB can’t even conduct a study, let alone issue a reg, unless and until it has a Director.
- The CFPB already has a very full plate without considering arbitration. On July 18, 2011, the CFPB issued a 32-page progress report titled “Building the CFPB.” Arbitration is not mentioned at all.
- Most importantly, the CFPB will be hard-pressed to support with empirical data, not just anecdotes, that a prohibition or a regulation is in the public interest and needed to protect consumers. Prior studies support the position that consumers do quite well (often better than they do in court) by arbitrating their claims. Under the APA, courts will set aside agency rules that are “arbitrary, capricious, an abuse of discretion or otherwise not in accordance with law.” Just last week the U.S. Court of Appeals for the District of Columbia Circuit in Business Roundtable v. Securities and Exchange Commission held that a new SEC rule which required public companies to provide shareholders with information about, and their ability to vote for, shareholder nominated candidates for the board of directors was invalid based in part upon insufficient empirical data relied upon by the SEC.
- If and when the CFPB conducts a study and then issues a final regulation (and everybody knows how long it takes to do that under the Administrative Procedures Act), it will apply only to an agreement entered into after the close of the 180-day period beginning on the effective date of the regulation. Thus, I’m not losing any sleep over what the CFPB might do with respect to arbitration in the near future.
I expect there to be increased litigation in the aftermath of Dodd-Frank. First, there will be class actions filed against national banks and federal thrifts for alleged violations of state laws, which plaintiffs’ attorneys and consumer advocates believe are no longer preempted as a result of Dodd-Frank. Second, once the CFPB starts issuing regs or initiating enforcement actions under the new authority to proscribe unfair, deceptive or abusive practices, I would expect plaintiffs’ attorneys to bring their own piggyback class actions.