On Tuesday, October 24, 2017, the Senate voted to nullify the Consumer Financial Protection Bureau’s (“CFPB”) arbitration rule (the “Rule”) in a 51-50 vote. Only two Republicans voted against the measure – Lindsey Graham (SC) and John Kennedy (LA). President Trump praised the vote, saying that he will sign the resolution when it reaches his desk. The Senate vote ensures that the arbitration Rule will not take effect.

The Bureau’s Arbitration Rule

On July 10, 2017, the CFPB issued its long-awaited final Rule banning class action waivers in arbitration provisions for covered entities. In addition, the Rule required covered entities to provide information to the Bureau regarding any efforts to compel arbitration. The Rule was slated to take effect in early 2018.

Subject to certain enumerated exemptions, the Rule applied to most “consumer financial products and services” that the CFPB oversees, including those that involve lending money, storing money, and moving or exchanging money, as well as to the “affiliates” of such companies when the “affiliate is acting as that person’s service provider.”

The Rule would have prohibited a provider from relying on a pre-dispute arbitration agreement entered into after the compliance date with respect to any aspect of a class action that concerns any covered consumer financial product or service.

Further, the Rule included a requirement that providers who used pre-dispute arbitration agreements to submit to the CFPB certain records relating to arbitral and court proceedings. The Bureau intended to use the information to continue monitoring such proceedings for developments that implicated consumer protection concerns.

Procedural History of the Challenge

On July 25, 2017, only two weeks after the Bureau issued the Rule, the House of Representatives voted to repeal the Rule under the Congressional Review Act, which permits Congress to overturn regulations with a simple majority vote. Republican representatives argued that the Rule would negatively affect business, while House Democrats countered that the Rule protects Americans’ right to seek redress of harms in court. In the weeks leading up to the Senate’s vote, Democratic AGs from around the nation urged lawmakers to vote against the measure and consumer advocates branded the legislation as a boon to financial institutions. Meanwhile, the Department of the Treasury released a report critical of the Rule, claiming that it rested on a shaky foundation of cherry-picked data. The Senate approved the repeal on October 24, 2017, in another party-line vote.

Practical Takeaways

The impending March 2018 deadline imposed by the Rule has now been lifted by Congress’s invalidation of the Rule. Going forward, the struggle between some state courts and the Supreme Court of the United States over state law limitations on the enforceability of arbitration agreements under the Federal Arbitration Act (FAA) likely will continue indefinitely. As illustrated most recently in DIRECTV v. Imburgia, 136 S. Ct. 463 (2015), the Supreme Court has repeatedly reversed state court refusals to enforce arbitration agreements, applying the broad pro-arbitration policy embodied in the FAA. Some States and State courts, on the other hand, have attempted to limit arbitration under state law. A notable recent example is California’s SB 33, which permits an existing customer of a bank to sue a depository bank when a fraudulent account is opened unknowingly in the consumer’s name. With the invalidation of the Rule, this struggle will continue.

Consumer-facing companies that do not have an arbitration program, or a program that has not been recently refreshed, might now consider adding or updating arbitration clauses to their agreements.

Troutman Sanders advises clients both within and outside the CFPB’s authority in developing and administering consumer arbitration agreements, and has a nationwide defense practice representing financial institutions and other consumer-facing companies in many types of class actions and individual claims. We will continue to monitor these regulatory developments.