CFPB Arbitration Rule: Legality, Ethics, and Consumer Rights

Introduction and Background

The Consumer Financial Protection Bureau (CFPB) was formed in July 2010 by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The CFPB consolidates most federal consumer financial protection authority under one roof. On July 10, 2017, the CFPB announced a new rule that deterred companies from using mandatory arbitration clauses to prevent groups of consumers from seeking justice in court.

Congress passed the Consumer Protection Act in response to the late-2000s recession and financial crisis. On September 17, 2010, former President Barack Obama officially appointed Elizabeth Warren as the President's Assistant and Special Advisor to the Secretary of the Treasury on the Consumer Financial Protection Bureau. The agency was formally established on July 21, 2011.

The Bureau's critical focus areas are mortgages, credit cards, and student loans. Although the Bureau is an independent body, it is funded by the United States Federal Reserve under the U.S. Treasury Department. Its core functions include writing and enforcing rules for both bank and non-bank financial institutions, evaluating markets, and receiving and tracking consumer complaints — all to ensure fairness, transparency, and equality for consumers of financial products.

The agency's Director at the time of this writing was Kathy Kraninger, nominated on June 16, 2018, by President Donald Trump. The Director of the CFPB is nominated by the President of the United States.

The CFPB Arbitration Rule Explained

There has been a longstanding debate about the fairness of mandatory arbitration clauses. The CFPB conducted a comprehensive study and found that seven out of eight well-known mobile wireless providers — covering 99.9% of total subscribers — had a mandatory arbitration clause in their contracts. Moreover, more than 90% of credit card issuers include arbitration clauses in their contracts with consumers.

Those who objected to the new rule were concerned that it benefited trial lawyers rather than ordinary citizens. They believed the rule was designed to help trial lawyers assemble class-action suits and ultimately harm taxpayers. Public comments submitted during the rulemaking period reflected these concerns. One commenter wrote: "I am writing in regards to the legislation about helping trial lawyers. This nation's lawyers should not be receiving any help from our federal government…" Another stated: "This proposed regulation isn't about protecting consumers. It's designed to make it easier for trial lawyers to gather big class-action groups, allowing them to collect bigger fees…"

The Wells Fargo case illustrates the real-world stakes of mandatory arbitration. Wells Fargo initially opposed a class action filed against it, and the court ruled in its favor — meaning consumers who had brought the suit were required to file individual arbitrations instead. Because very few customers would follow through on individual claims, Wells Fargo would have been liable for no more than $5 million to all claimants combined. However, due to sustained pressure from the public and Congress, Wells Fargo agreed to a class-action settlement of $142 million. This outcome clearly illustrates the difference in leverage between individual arbitration and a class-action lawsuit.

Legal Analysis and Due Process

The Dodd-Frank Wall Street Reform and Consumer Protection Act provides the statutory foundation for the CFPB and its rulemaking authority. Understanding how the CFPB Arbitration Rule came to exist requires distinguishing between two administrative law concepts: adjudication and rulemaking.

Adjudication is the determination of individual constitutional rights and obligations by focusing on specific parties and questions relating to prevailing or preceding facts. In deciding a case, a court applies current laws and policies to those facts. Rulemaking, by contrast, is the determination of regulation concerning the future conduct of persons, groups, or classes of people. The CFPB Arbitration Rule emerged through the rulemaking process, as it was directed at shaping future behavior in the marketplace rather than resolving individual disputes.

Due process is a legal requirement that the state respect all legally guaranteed rights. Rulemaking demands a higher degree of due process because it requires public participation as a democratic right. Adjudication, on the other hand, is generally limited to the aggrieved parties and the administrative agency; the broader public has a more limited role in that decision-making process. The CFPB followed the rulemaking route and solicited public comment before finalizing the rule. Nevertheless, Congress ultimately rejected the rule, characterizing it as unconstitutional.

Procedural due process limits the exercise of power by administrative agencies by requiring them to follow established procedures when adjudicating matters. If an agency violates procedural due process, an affected party may file a complaint or seek a court order compelling the government to comply. Substantive due process addresses the state's power to regulate certain activities through legislation. Federal courts may intervene when state or agency action undermines citizens' fundamental rights. Any state law or administrative rule that violates constitutional guarantees may be challenged in court. The legal elements a court weighs in such cases include equity and equality — the decision must be non-discriminatory and reflect reasonableness and fairness.

The CFPB Arbitration Rule was challenged as unconstitutional and capable of being voided through litigation. The rule's notice was published on November 22, 2017, in the Federal Register.

The most significant related litigation is PHH Corp. v. Consumer Financial Protection Bureau, 881 F.3d 75 (D.C. Cir. 2018). In the aftermath of the 2008 recession, Congress created the CFPB and granted it a significant degree of independence. The Bureau's single Director held broad rulemaking and enforcement powers and was protected from removal by the President without cause. This structure was challenged as an unconstitutional impediment to presidential authority. The D.C. Circuit Court ultimately ruled that the Bureau's structure is constitutional and that the Director lawfully possesses rulemaking and enforcement authority. As a legal conclusion, however, the CFPB Arbitration Rule itself was found to be outside permissible bounds and was struck down by Congress.

Conclusion and Recommendations

In conclusion, this report has comprehensively examined the legality and morality of the CFPB Arbitration Rule and its effects on community welfare. Arbitration can positively impact society, but the system requires a critical reassessment. The justice system is increasingly perceived as a private mechanism that advantages well-resourced institutions over ordinary citizens, and practical solutions must be found.

The recommended reform is that the Federal Arbitration Act (FAA) be amended to eliminate mandatory arbitration. Arbitration should be a voluntary process agreed to by both parties; if it fails to resolve a dispute, the aggrieved party should have an unimpeded right to seek redress in court. This kind of structural change will take time. The Forced Arbitration Injustice Repeal Act has not yet been enacted into law, meaning Americans must continue to navigate an arbitration system that, as currently structured, operates to their disadvantage.

References

Campbell, T. (2004). Prescriptive legal positivism: Law, rights, and democracy. Psychology Press.

CFPB arbitration rule under fire — WSJ. (2016, May 6). Dow Jones Institutional News.

Dick, A. (2017). Arbitration rights and the province of Congress: Does the CFPB arbitration rule violate the presentment clause? Administrative & Regulatory Law News, 43(1), 9–11.

Hayashi, Y. (2015, October 7). Sue the bank? You may get your shot; consumer financial protection bureau set to propose rules curbing mandatory arbitration in contracts for credit cards, bank accounts, and loans. Wall Street Journal (Online).

Koch, M. (2019). Problem with your bank account? Tell it to the… arbitrator? Boston College Law Review, 60(6), 1605–1640.

Lyons, D., & Lyons, L. (1965). Forms and limits of utilitarianism. Clarendon Press.