DALLAS (Legal Newsline) - Nearly three months after the Consumer Financial Protection Bureau issued its final rule banning companies from using mandatory arbitration clauses to deny groups of people their day in court, more than a dozen business and financial groups have banded together to file a lawsuit against the bureau and the rule in a Texas federal court.

The groups filed their lawsuit Sept. 29 in the U.S. District Court for the Northern District of Texas, Dallas Division, arguing the rule, finalized and announced in July, is invalid and should be set aside.

The plaintiffs include: the U.S. Chamber of Commerce, American Bankers Association, American Financial Services Association, Consumer Bankers Association, Financial Services Roundtable, Texas Association of Business, Texas Bankers Association, Grand Prairie Chamber of Commerce, Greater Irving Las Colinas Chamber of Commerce, Grapevine Chamber of Commerce, Lubbock Chamber of Commerce, Bay City Chamber of Commerce, Greater New Braunfels Chamber of Commerce, Longview Chamber of Commerce, McAllen Chamber of Commerce, North San Antonio Chamber of Commerce, Paris-Lamar Chamber of Commerce and Port Arthur Chamber of Commerce.

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Both the CFPB and its director, Richard Cordray, are named defendants.

“Congress enacted the strong and long-standing federal policy favoring arbitration almost 100 years ago in the Federal Arbitration Act. The Supreme Court repeatedly has recognized and applied that policy,” the groups wrote in their 51-page complaint. “Consequently, the use of arbitration to resolve consumer disputes has been a common practice for decades.

“Its benefits are manifold: unlike litigation, arbitration minimizes transaction costs and facilitates speedy and efficient dispute resolution, providing significant advantages to consumers and the public at large.”

The CFPB’s much-anticipated new rule, announced July 10, prohibits the use of mandatory arbitration clauses in consumer financial products and services contracts to prohibit class action lawsuits.

Financial institutions, under the new rule, can still include arbitration clauses, but the clauses cannot be used to stop consumers from filing class actions.

Basically, if companies want to include an arbitration clause in a consumer contract, very specific language must be used.

The bureau, which has jurisdiction over banks, credit unions, securities firms, payday lenders, mortgage-servicing operations, foreclosure relief services, debt collectors and other financial companies operating in the U.S., argues its new rule will deter wrongdoing by restoring consumers’ right to join together to “pursue justice and relief” through group lawsuits.

“Arbitration clauses in contracts for products like bank accounts and credit cards make it nearly impossible for people to take companies to court when things go wrong,” Cordray said in July. “These clauses allow companies to avoid accountability by blocking group lawsuits and forcing people to go it alone or give up. Our new rule will stop companies from sidestepping the courts and ensure that people who are harmed together can take action together.”

But the business and financial groups argue in their complaint that the new rule renders class action litigation the “default means” of resolving such disputes.

“Arbitration gives consumers the ability to bring claims that they could not realistically assert in court, including the small and individualized claims that they care the most about. In contrast, class action litigation is significantly less effective than arbitration in addressing consumer claims,” they wrote. “By definition, class actions are not available to address individualized consumer complaints. And most of the class actions that are initiated lead to no or minimal recovery for absent class members.”

Not to mention that arbitration lowers businesses’ costs of resolving disputes, which creates savings that companies can -- and do -- pass on to their customers, the groups argue.

“These benefits can be realized only when parties are free to enter into arbitration agreements that eliminate the huge attorneys’ fees and other litigation costs associated with burdensome class action litigation,” they wrote.

The business and financial groups contend the rule is the product of and is “fatally infected by” the unconstitutional structure that Congress gave the CFPB when it created the bureau in the Dodd-Frank Wall Street Reform And Consumer Protection Act.

The groups also contend the rule violates the Administrative Procedure Act, or APA, because the CFPB failed to observe procedures required by law when it adopted the conclusions of a “deeply flawed” study that improperly limited public participation, applied “defective methodologies,” “misapprehended” the relevant data, and failed to address “key considerations.”

“The study was the product of a closed process that largely precluded meaningful public comment on the key issues,” they wrote of the bureau’s report, released in 2015. “That failure to engage with knowledgeable stakeholders distorted the Bureau’s analysis, evidently with the aim of allowing the Bureau to reach a preordained conclusion -- regardless of the evidence.”

According to the complaint, the bureau ignored data that demonstrated both the benefits of arbitration to consumers and the failure of class action lawsuits to provide consumers with meaningful benefits -- in addition to failing to consider the “large volume” of additional data that confirms both points, the groups wrote.

“The study likewise wholly failed to address key policy questions related to the regulation of arbitration, among them whether a rule mandating the availability of class action litigation would lead to the complete abandonment of arbitration and, if so, whether the elimination of the only practical method for vindicating individual consumer claims is justified by the interest in encouraging class action litigation that almost never produces concrete benefits for consumers,” the complaint states.

“As a consequence of these omissions, the Bureau made no serious effort to weigh the comparative costs and benefits of implementing a regime that substitutes costly class action litigation for efficient arbitration.”

The groups also contend the rule violates the APA because it runs counter to the record before the bureau, failing to take account of “important aspects of the problem it purports to address.”

In addition, the rule violates the Dodd-Frank Act because it fails to advance either the public interest or consumer welfare, the groups argue.

“If the Rule goes into effect, it will inflict immediate, irreparable injury on Plaintiffs,” they wrote. “Providers of consumer financial products and services will incur significant legal and compliance costs in adapting their businesses to the new rule; the vast majority of these costs will be wasted, and not recoverable, if the Rule ultimately is deemed to be contrary to law.

“And so long as the effects of the Rule are being felt, providers of such services will both be denied the benefits of arbitration and exposed to expensive class action litigation.”

The groups, in their complaint, request entry of a judgment vacating and setting aside the rule. They also request entry of orders staying the implementation of the rule pending the conclusion of judicial review and enjoining the bureau and Cordray from enforcing the rule.

“Such a broad showing of support from every corner of the consumer finance industry demonstrates how critically important today’s filing is,” said Chris Stinebert, president and CEO of the American Financial Services Association, which represents traditional installment lenders and vehicle finance companies.

“The CFPB’s anti-arbitration rule would produce class action lawsuits that will take years to be heard, clog the courts, and result in comparatively small payouts for consumers. By contrast, disputes settled by arbitration result in quick decisions and pay-outs for consumers that average higher than class action settlements.”

The CFPB could not immediately be reached for comment on the lawsuit; however, Cordray recently addressed some criticisms of the rule in a column published in The Hill Monday.

He said recent scandals make it difficult to defend “denying justice and relief” to groups of people who have been wronged.

“Why should Wells Fargo be able to block groups of customers from suing over fake accounts? Why should Equifax be able to force people to surrender their legal rights when the company put their personal information at risk?” the former Ohio attorney general wrote.

The U.S. House of Representatives recently voted 231-190 -- with only one Republican voting against and no Democrat voting for -- to void the rule.

However, a similar measure has yet to pass the U.S. Senate.

From Legal Newsline: Reach Jessica Karmasek by email at jessica@legalnewsline.com.

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Organizations in this Story

Consumer Financial Protection Bureau
1700 G St NW
Washington, DC - 20552

U.S. Chamber of Commerce
1615 H St NW
Washington, DC - 20062

U.S. District Court for the Northern District of Texas
341 Pine St
Abilene, TX - 79601

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