U.S. Senate, in late-night narrow vote, rolls back CFPB’s anti-arbitration rule

By Jessica Karmasek | Oct 25, 2017

WASHINGTON (Legal Newsline) - Late Tuesday, the U.S. Senate passed a resolution striking down the Consumer Financial Protection Bureau’s new anti-arbitration rule.

The Senate took a 15-minute roll call vote at 9:46 p.m. ET on passage of H.J. Res. 111, the resolution of disapproval with respect to the bureau’s rule.

The resolution narrowly passed, with a 51-50 vote. Vice President Mike Pence, a Republican, cast the tie-breaking “yes” vote.

The Senate, running out of time to act on the resolution, voted nearly three months after the GOP-led House voted to overturn the rule.

Only one Republican senator voted against the resolution, South Carolina’s Lindsey Graham.

Under the CFPB’s much-anticipated new rule, announced July 10, financial institutions could have included arbitration clauses, but the clauses could not be used to stop consumers from filing class actions.

Basically, if companies wanted to include an arbitration clause in a consumer contract, they would have had to use very specific language.

Opponents of the rule, including U.S. Sen. Mike Crapo, R-Idaho, have argued it is based on a flawed study and said consumers would have been worse off by removing access to an important dispute resolution tool.

“Today’s vote was an important step in asserting Congressional oversight of an agency that has routinely demonstrated a lack of accountability,” Crapo, who introduced the resolution in the Senate in July, said late Tuesday.

“Rather than re-examine the rule and develop alternatives to mandatory arbitration, the CFPB chose an all-or-nothing approach, leaving Congress no choice but to overturn it.”

Crapo and U.S. Sen. Sherrod Brown, D-Ohio, recently were drawn into a war of words between CFPB Director Richard Cordray and Keith Noreika, acting Comptroller of the Currency, over the rule.

Last week, Noreika wrote a letter to Crapo and Brown, who are the chairman and ranking member of the Senate Committee on Banking, Housing and Urban Affairs, respectively. He complained that the bureau’s proposed regulation would have disastrous results for both the financial services industry and its customers -- while benefiting trial lawyers. 

Days before, an opinion piece by Noreika was published on The Hill, alleging the CFPB ignored his office’s concerns when it finalized the rule.

Cordray fired back in a response, also published in The Hill, calling Noreika’s column a “gratuitous attempt to undermine the evidence that supports our rule.”

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., has argued its rule would deter wrongdoing by restoring consumers’ right to join together to “pursue justice and relief” through group lawsuits.

When asked about Noreika and Cordray’s letter and the agency heads trading barbs, both Crapo and Brown declined to comment.

However, Brown didn’t hold back in slamming those fellow senators who voted in favor of the rule’s repeal, saying they effectively “stripped consumers of their rights.”

Forced arbitration clauses are regularly tucked into the fine print of financial contracts customers must sign in order to obtain services from banks, credit card companies, payday lenders and other financial institutions.

By signing such contracts, customers -- often unknowingly -- sign away their rights to access the court system if they are cheated, he explained.

“Forced arbitration takes power away from ordinary people and gives it to big banks and Wall Street companies that already have an unfair advantage,” Brown said.

“By voting to take rights away from customers, the Senate voted tonight to side with Wells Fargo lobbyists over the people we serve.”

Karl Frisch, executive director of Allied Progress, a consumer watchdog organization, agreed.

“Today, Senate Republicans voted to give companies like Wells Fargo and Equifax a get out of jail free card,” he said, referring to the companies’ recent scandals and their use of mandatory arbitration clauses.

“This repeal will hurt millions of consumers across the country by denying them their rightful day in court when they get screwed over by financial predators.”

He continued, “It’s clear why Senate Republicans passed this bill -- because they care more about the big banks and financial institutions that have funded their campaigns than protecting consumers.”

Other groups, including the Financial Services Roundtable, which lobbies for America’s financial services industry, contend the rule’s repeal actually will benefit consumers and ensure they -- not trial lawyers -- will receive larger and quicker financial compensation from disputes with companies.

“Today the Senate acted to preserve consumer access to low-cost arbitration and enable Americans to resolve disputes in a timely manner,” FSR’s Head of Government Affairs Anthony Cimino said late Tuesday.

“We applaud Congress for exercising its oversight authority on this important consumer protection issue.”

So, what happens next?

Tuesday’s resolution now will be sent to the White House, and is expected to be signed into law by President Donald Trump. That means the rule will be overturned and not go into effect.

Congress’ action also means the CFPB will be precluded from re-issuing the same or a substantially similar rule -- unless federal lawmakers specifically authorize enactment, explained Frederick S. Levin, a partner with Buckley Sandler LLP in Los Angeles.

Levin represents financial institution clients in cases related to consumer and securities class action matters. He and his firm represent the top 10 mortgage lenders and the top 10 mortgage servicers in the U.S.

Levin said it remains unclear what impact repeal of the bureau’s rule will have on other efforts to curb the Dodd-Frank Wall Street Reform and Consumer Protection Act and the CFPB’s authority.

“Last June, the House approved a bill introduced by Rep. Jeb Hensarling to repeal portions of the Dodd-Frank Act and restructure the CFPB,” he explained. “This bill is pending in the Senate.”

Hensarling, a Republican who heads the House Financial Services Committee, could not immediately be reached for comment on Tuesday’s Senate vote.

Levin said the rule’s repeal could mean Senate Republicans have the bare minimum votes to enact a broader repeal of the Dodd-Frank Act.

But it also may “dampen” the sense of urgency regarding the Dodd-Frank Act and CFPB reform, he said.

The CFPB was created in 2010 by the Dodd-Frank Act. It has since been headed by Cordray, a Democrat and former Ohio attorney general.

An ongoing federal lawsuit questions the bureau’s structure in that the director can’t be removed without cause. A three-judge panel of the D.C. Circuit has found this unconstitutional, and the case now will be heard by the entire roster of D.C. judges.

Trump’s administration has indicated a preference to remove the CFPB director at-will, meaning Cordray’s days would likely be numbered if the D.C. Circuit’s ruling is affirmed.

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

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