One week ago, the CFPB’s arbitration rule seemed more or less doomed to the scrap heap of financial regulatory history. Although it was approved in final form by the CFPB in July – after a lengthy and contentious rulemaking process – Republican lawmakers vowed to strike down the law within 24 hours of its passage via the Congressional Review Act.
The Comptroller of the Currency formally requested that the CFPB halt implementation of the rule while the OCC reviewed its effect on the banking industry. Meanwhile, the industry itself roiled against the law through countless actions and lobby groups, noting that it would do far more to help attorneys than to protect consumers.
According to The Los Angeles Times, one of the more vociferous industry opponents of the arbitration rule was the Consumer Data Industry Association. The CDIA is the lobbying organization that represents the big three data collection agencies: Equifax, TransUnion and Experian. Among the CDIA’s arguments were that the rule would inflict extensive material damage to their core business, and could open them up to unending class actions suits. Those types of suits, the CDIA argued, often force firms to settle or face stacking court costs that can exceed settlements, even if they win.
Ironically, the unfortunate breach of 143 million consumer records housed at Equifax may become the unexpected – and completely unwilling – savior of the all-but-left-for-dead arbitration rule.
Whatever people’s feelings about arbitration as a means of resolving disputes between customers and creditors, it can be generally agreed that there are good times and bad times to insert them into consumer contracts. For example, if a credit rating agency has just allowed 143 million Social Security numbers and 208,000 people’s records to be hacked from its systems, and you are offering to sign up aggrieved consumers for identity monitoring, that may not be the best time to slip in an arbitration clause. Consumers who have just been breached will certainly bristle at signing away their rights to join a class and file suit.
Unfortunately for Equifax, that is exactly what they did – and sharp-eyed consumer groups noticed that the free credit monitoring Equifax was offering to breach victims came with a catch: a mandatory arbitration clause. Although that clause would not protect Equifax from a class-action suit resulting from the breach itself, it would cover them from consumers who signed up for Equifax’s free credit monitoring services and, in so doing, opted themselves out of joining a class-action lawsuit.
That mandatory arbitration clause lit the fuse of a new arbitration debate that otherwise might not have happened.
“If Equifax is genuine about wanting to protect customers, it must remove forced arbitration immediately from TrustedID and any other services offered to victims of the data breach,” Senator Sherrod Brown, the top Democrat on the Senate Banking Committee, said in a statement earlier on Friday.
And, in fact, that is exactly what Equifax did. The free credit monitoring offered as of last Friday originally included an arbitration clause. As of this morning, Equifax had removed it as of its last release, issuing a statement saying there would be no waiver of rights for individuals signing up.
But the rules defenders were already seizing the larger issue.
“[The CFPB’s] new rule would stop companies like Equifax from avoiding legal accountability like this – as long as [the] GOP doesn’t reverse it,” Democratic Senator Elizabeth Warren said on her Twitter account, as reported by American Banker.
The Abbreviated History of the Arbitration Rule
Arbitration clauses are currently inserted into a wide variety of consumer contracts. They are basically a binding commitment on the consumer’s behalf to settle future disputes with their creditors in front of a professional arbitrator instead of a judge.
Arbitration is a faster and less legally intensive method of dispute resolution than a court case. However, consumer groups tend to dislike them because consumers can only settle individually in arbitration matters, and cannot form or join class-action lawsuits. Critics of arbitration clauses – among them the CFPB Director Richard Cordray – argue that large corporations use them to bully consumers and make it impossible for them to leverage class-action suits, even when such suits are clearly merited.
“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,” said Cordray in a CFPB statement detailing the rule. “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 opponents of the law note that statistically, consumers don’t get better rulings in lawsuits than they do in front of arbitrators, and that class-action lawsuits do far more to enrich trial lawyers than to actually protect consumers.
“The CFPB has ignored its own research and gone forth with a rule [that] will deprive consumers of an efficient, inexpensive and convenient manner [in which] to resolve disputes,” noted Brian Tate, president and CEO of the Network Branded Prepaid Card Association (NBPCA). “The Bureau’s final rule does not adequately consider the costs of its proposal on consumers or financial services providers. According to the Bureau’s own research, arbitration has proven to be a faster and more affordable alternative to class action litigation, which doesn’t always benefit consumers and is not always available for all claims.”
That industry argument had a lot of traction, particularly with Republican lawmakers who take a rather critical view of the CFPB’s penchant for unilateral regulation.
And those legislators had what seemed to be a surefire strategy for preventing the rule from ever actually making it onto the books, leveraging the Congressional Review Act during the 60-day window between when the rule is passed and when it goes into effect.
The CRA allows Congress to review new federal regulations issued by government agencies and overturn them with a majority vote. Although the law is 20 years old, it had only been used once before 2017. But this has been a banner year for the law, as it has been used 14 times to undo Obama-era rules.
The CRA not only stops rules from going into effect, but also prevents agencies from issuing “substantially similar” regulations for the next five years.
A week ago, the answer was clear: the House voted in July to repeal the rule, and the Senate seemed likely to do the same in the next few weeks. Consumer groups have lobbied hard to prevent that, and Cordray penned an op-ed for The New York Times defending the necessity of the rule. It didn’t seem to resonate with consumers, as arbitration is an issue that rarely comes up for those who are not involved in a dispute with a merchant or creditor.
Then came the Equifax breach. Consumers who had already been victimized by cybercriminals didn’t seem to like being pushed around by the firm who had let it happen. Suddenly, arbitration was in the public spotlight – and not in a way that would help legislators achieve their goal of repealing it.
“The optics of this situation change the congressional calculus regarding the arbitration CRA and lessen the likelihood of reversal,” said Isaac Boltansky, a senior vice president and policy analyst at Compass Point Research & Trading.
To pass a repeal of the arbitration clause, Senate Banking Committee Chairman Mike Crapo needs all but two affirmative Republican votes, as no Democrat is expected to vote against it. In the wake of the Equifax breach, Senator Lindsey Graham has already signaled that he will cast a “no” vote on this issue. That means Crapo can only lose one more vote – and Republican Senators John Kennedy of Louisiana, Sue Collins of Maine and Lisa Murkowski of Alaska are all unknowns, and expected to lean toward “no.”
Time is also not on Crapo’s side. He has only five weeks to bring this to the floor of the Senate, which is already reviewing an increasingly crowded docket, to get the vote in by the November window. Once the 60 days closes, the rule goes into effect and the CRA is no longer a threat.
Early last week, Crapo was confident he had the votes, but this week?
Not so much.
So in the end, it was not consumer groups, Cordray’s passionate appeals or even Warren’s zesty tweeting that managed to keep the arbitration clause alive to fight another day.
Instead, it was one ill-timed hack – and one very poorly conceived consumer offer from a firm that ironically had wanted nothing more than to protect its ability to use arbitration clauses in the future.