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Director Cordray responds to questions on proposed arbitration rule

Posted in Arbitration, CFPB Rulemaking

Director Cordray has sent a letter to Senator Jeff Flake responding to a series of questions posed by the Senator on the CFPB’s proposed arbitration rule.  The comment period on the proposed rule closed on August 22, 2016.  Senator Flake posed his questions on August 19, 2016, but Director Cordray did not respond until January 30, 2017.  Senator Flake had prefaced his questions with the following pointed criticism of the proposed arbitration rule:

Since Congress passed the Federal Arbitration Act in 1925, federal law has protected the use of arbitration as a means to resolve private disputes.  As an alternative to expensive litigation, millions of Americans have since enjoyed the faster resolution time associated with arbitration.  Arbitration is also less costly than litigation for consumers because most arbitrators are limited in the fees they can charge for their services.  The use of class-action waivers, which the Supreme Court ratified as recently as 2011, allows financial institutions and consumers to resolve their disputes in arbitration rather than entering into costly class litigation.  Eliminating the availability of these waivers, as the Bureau proposes to do, would put financial institutions and their customers at the mercy of those looking to initiate lengthy court proceedings that yield little benefit to either the consumers or the institutions.

As you know, Section 1028 of the Dodd-Frank law required the Bureau to conduct a study on arbitration and authorized the Bureau to issue a regulation to “prohibit or impose limitations” on arbitration agreements.  However, under current statute, such regulations are permissible only if the study finds that they are “in the public interest and for the protection of consumers.”  Upon reviewing the study, I have concerns about the extent to which it justifies the Notice of Proposed Rulemaking.  First and foremost, the benefit of class settlements to consumers is very much an open question, yet the Bureau appears to have chosen a side while failing to fully consider the ramifications and effect on protections afforded consumers.  For example, the study did not investigate whether class counsel act in good faith as agents of class litigants.

Among the questions asked by Senator Flake was a question asking about the effect of the CFPB’s enforcement power on the net benefit of class actions and another asking whether, given that attorney’s fees typically comprise a substantial portion of the aggregate payments made in class action settlements, the CFPB considered placing a limit on the percentage of fees an attorney can seek in a lawsuit or had a view as to what would be a reasonable range of attorney’s fees by percentage of payments made in a settlement.  Despite the CFPB’s recovery of more than $11 billion for consumers through enforcement actions and over $300 million in supervisory actions, Director Cordray stated that “public enforcement is not itself a sufficient means to enforce consumer protection laws and consumer finance contracts.”  With regard to attorneys’ fees, Director Cordray referenced the courts’ role in reviewing the reasonableness of attorney’s fees when approving class action settlements and indicated that the CFPB had not used data obtained in its arbitration study “to determine whether a certain percentage would be a reasonable amount to award to plaintiffs’ attorneys.”

Although there was speculation that the CFPB might finalize its arbitration rule by Inauguration Day, the CFPB has not yet issued a final rule.  A final rule will likely be challenged under the Congressional Review Act (CRA), a law enacted in 1996 that establishes a procedure by which Congress can nullify a covered rule adopted by a federal agency.  Last week, Senator David Perdue initiated the CRA nullification process with respect to the CFPB’s prepaid card rule.