CFPB Arbitration Rule: Legality, Ethics, and Community Welfare

Introduction

Law and ethics are deeply interconnected: violations of ethical behavior require legal enforcement to serve as a deterrent. The law and its jurisdictions set standards of conduct so that ethical behavior is observed at both the organizational and individual level. It can be difficult to determine under what circumstances particular actions are considered ethical, especially when they directly affect the public. Ethical management is crucial not only for economic profitability but for society at large. Business ethics are intertwined with how firms engage with the world, involving all stakeholders, where dealings with one party may have indirect and unintended effects on others. These concerns extend to questions of human morality, vice and virtue, and fairness.

This paper presents a three-value analysis of law, ethics, and community welfare. When business or agency ethics are discussed, the set of rules defining right and wrong is highlighted, since the culture, attitudes, and feelings that govern a workplace determine what is considered ethically acceptable. Conflict among these values creates a climate in which stakeholder interests clash, giving rise to issues of bribery and competing loyalties. Ethical action also extends to the arena of social responsibility, since businesses and agencies are answerable to the communities in which they operate. Social responsibility is the obligation of policymakers and decision-makers to take actions that promote welfare and improvement (Singh & Singh, 2013).

The central topic of this paper is the arbitration rule of the Consumer Financial Protection Bureau (CFPB) and its revocation by the U.S. government, which left consumers unable to file combined lawsuits against banks or other financial institutions for illegal actions. The CFPB consolidated federal consumer protection responsibilities established by the Dodd-Frank Wall Street Reform and Consumer Protection Act in July 2010 (Copeland, 2010). On July 10, 2017, the CFPB announced a new rule barring the use of mandatory arbitration clauses that had previously prevented consumers from seeking justice in court (Swanson, 2017). The rule's primary purpose was to allow consumers to use class-action lawsuits against financial companies — particularly credit card issuers and other financial institutions — for their wrongful conduct (Hayashi, 2015). However, after the government revoked the arbitration rule, former CFPB Director Richard Cordray urged that the rule be reinstated. He argued that ordinary Americans would lose their ability to speak out against companies that wronged them, and that the public deserved the chance to pursue their legal rights.

The topic's significance is directly tied to the social responsibility of businesses and agencies toward society's welfare. Consumers were effectively barred from voicing concerns about illegal actions by banks and credit card companies, and monetary losses could no longer be tried collectively in court. Proponents of the revocation argued that it spared both citizens and financial companies from the heavy costs of litigation. Critics, however, contended that it placed an unjust burden on the general public by silencing them in the face of institutional wrongdoing.

Background: The CFPB and the Arbitration Rule

A recession and financial crisis in the late 2000s forced Congress to pass the Consumer Protection Act (Legislative Attorney, 2014). President Barack Obama appointed Elizabeth Warren as the President's Assistant and Special Advisor to the Secretary of the Treasury for the Consumer Financial Protection Bureau. The agency was formally established on July 21, 2011, with a primary focus on mortgages, credit cards, and student loans. Although the bureau operates independently, it is funded by the United States Federal Reserve under the authority of the U.S. Treasury Department. The bureau is responsible for devising rules for both bank and non-bank financial institutions. It also evaluates markets, receives and reviews consumer complaints, promotes fairness in financial matters, and ensures impartiality in the delivery of consumer financial products.

The agency's home page is https://www.consumerfinance.gov/. The CFPB's findings revealed that seven out of eight major mobile wireless providers — covering 99.9% of all subscribers — included mandatory arbitration clauses in their consumer agreements. More than 90% of credit card issuers also embedded arbitration clauses in their contracts with consumers. The CFPB found that consumers filed approximately 600 arbitration cases and 1,200 federal lawsuits per year on average (Consumer Financial Protection Bureau, 2015). Between 2010 and 2012, six different consumer finance markets were subject to such filings, and arbitrators were required to award consumers losses of up to $175,000. Under the arbitration rule, an estimated 32 million consumers were eligible for relief from financial institutions.

After the CFPB's arbitration rule was overturned in 2017, there was no major organized public backlash, though prominent voices disapproved. A Washington, D.C. nonprofit consumer advocacy group, Public Citizen, criticized the overturning via social media, warning that bad actors like Wells Fargo would effectively receive a free pass to commit fraud against customers (Grurevich & Bleemer, 2017). Another consumer watchdog group argued that the overturn would harm consumers across the country, amounting to a clear denial of their legal right to protection against financial misconduct. Major news outlets reported that the Senate's vote made it easier for banks to avoid being sued collectively, since combined class-action lawsuits were prohibited and individual filings were only permitted in certain circumstances — dramatically increasing the cost of litigation for ordinary citizens (Koch, 2019).

Wells Fargo faced a class-action filing that it initially opposed, and the court ruled in its favor. Consumers who had filed jointly now had to file individually, raising their litigation costs and reducing the incentive to seek compensation. As a result, Wells Fargo would no longer have been required to pay the $5 million previously mandated by law. When public and congressional pressure mounted, Wells Fargo eventually agreed to pay $142 million to settle the class action. This outcome illustrates a key distinction between arbitration and class-action litigation.

Reactions to the overturning of the rule were mixed. Supporters viewed it as a victory for both consumers and financial institutions, arguing that both parties had faced high costs in filing and defending cases, and that the litigation had primarily benefited trial lawyers rather than ordinary citizens. Opponents contended that the decision violated the public's freedom to exercise their legal rights against institutional misconduct, effectively allowing financial businesses to harm consumers without accountability.

Legal Analysis: Rulemaking, Adjudication, and Due Process

The enabling legislation underlying the CFPB's creation is the Dodd-Frank Wall Street Reform and Consumer Protection Act (Public Law, 2010). At the beginning of 2007, the United States experienced its most severe financial crisis since the Great Depression (Consumer Financial Protection Bureau, n.d.). Consumers faced shrinking savings, declining home values, job losses, and struggling small businesses. Many were forced into deceptive loan agreements they could not fully understand. In response, President Obama directed Congress to pass the Dodd-Frank Wall Street Reform and Consumer Protection Act, which established the CFPB to consolidate all consumer financial protection responsibilities under one agency. The CFPB's sole mandate was to give American consumers financial protection and authority over their financial products and services.

Adjudication verifies individual constitutional rights and duties by focusing on the specific parties and circumstances of a particular case (Rachlinski, 2005). Courts apply existing laws and regulations to the facts presented and reach binding determinations for the affected parties. Rulemaking, by contrast, establishes future conduct expectations for groups, classes, or individuals, functioning more like legislation. Rulemaking requires greater due process since it guarantees public participation as a democratic right. Adjudication involves only the concerned parties and the administrative agency; the public is restricted from participating in the process. The CFPB's original arbitration rule was created through the rulemaking process, emphasizing future conduct for society broadly, rather than deciding on past individual events. However, when the rule was overturned, the public's input was not solicited — a procedural shortcoming that drew criticism.

The CFPB arbitration rule was officially invalidated on November 22, 2017, when the arbitration agreement provisions were rendered ineffective (Federal Register, 2017). The decision was published in the Federal Register on the same date and made available to the public for review. Generally, a rule or governmental action can be challenged on due process grounds in two ways: procedural due process and substantive due process. Procedural due process prohibits administrative agencies from exercising their powers arbitrarily and demands that they follow proper procedures when affecting individual rights (Williams, 2010). If an unfair procedural process is identified, an individual can file a complaint or seek a court order requiring the government to follow proper procedures.

Substantive due process grants the state authority to govern certain actions and enact legislation. If a citizen's fundamental rights are undermined, federal courts have authority to intervene. Any state law may be challenged if it violates the Constitution.

The legal elements courts consider when rendering decisions include equity and equality (Ignatescu, 2013). Equity allows judicial equality to be humanized, ensuring that correct actions are taken with fairness and proportionality. Courts must finalize decisions without bias, maintaining proportional equality between parties based on reasonableness and non-discrimination. The controversial overturning of the CFPB rule could be challenged under substantive due process, since citizens' fundamental rights were severely curtailed when they were prohibited from jointly suing financial institutions for unlawful conduct. Citizens were effectively barred from voicing concerns about misconduct by the very institutions entrusted with protecting their monetary interests. Federal courts may intervene when the state has acted to deny the public a vital right.

The CFPB rule was litigated in PHH Corp. v. Consumer Financial Protection Bureau, 881 F.3d 75 (D.C. Cir. 2018) (United States Court of Appeals, 2018). The parties were the CFPB and PHH Corporation, an American mortgage servicer with over 30 years of operation. PHH challenged the removal protections afforded to the CFPB Director, arguing that such protections unconstitutionally disrupted the separation of powers. When Congress established the CFPB following the 2008 recession, it granted the Director authority over rulemaking and enforcement. Because the agency operated with a degree of independence and the Director could only be removed by the President for cause, PHH argued this structure was unconstitutional. The court ultimately ruled that the CFPB has full authority to make and enforce rules.

From a legal standpoint, the overturning of the CFPB's arbitration rule was procedurally problematic because it did not engage public opinion, as required by the rulemaking process. The general public was barred from taking combined action against financial companies — with the exception of mortgage firms — and the President signed the resolution without public consultation. Although the CFPB had independent rulemaking authority, its original purpose — protecting consumers from the kind of financial crisis that occurred in 2007 — was undermined when the rule was revoked in 2017. Consumers serve as a bridge between business and society, and when they are cheated without recourse, the gap between institutional power and individual rights widens dangerously.

Conclusion

By concluding that legality and morality are the two basic essential principles for community well-being and enablement, it would be appropriate to say that CFPB's arbitration rule affected various segments of society both positively and negatively. Arbitration can have a positive impact on society if the system operates fairly. However, the current justice system appears to serve specific segments of society more than others, and particularly not the underprivileged. Solutions are needed to challenge this imbalance.

The recommendation of this paper is that the Federal Arbitration Act (FAA) should be amended to eliminate mandatory arbitration. Arbitration should be a voluntary mechanism between the two affected parties, allowing them to negotiate the terms of any agreement. If arbitration is unsuccessful, the aggrieved party should be permitted to seek compensation through the court. However, achieving this change will take time. The Forced Arbitration Injustice Repeal Act has not yet been enacted into law, which means that Americans will have to endure the current system until legislative reform is achieved. In the meantime, administrative agencies, consumer advocacy groups, and government officials must work together to empower consumers, educate communities, and ensure that the principles of fairness and social responsibility remain at the center of financial regulation.

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