Populist Conundrum: Big Banks or Plaintiffs

NORTH CAROLINA BANKING INSTITUTE Volume 22 | Issue 1 Article 11 3-1-2018 Populist Conundrum: Big Banks or Plaintiffs' Bar? Banks Win as Congress Overrides the CFPB Rule Banning Class Action Waivers in Arbitration Agreements Rebecca D. Floyd Follow this and additional works at: http://scholarship.law.unc.edu/ncbi Part of the Banking and Finance Law Commons Recommended Citation Rebecca D. Floyd, Populist Conundrum: Big Banks or Plaintiffs' Bar? Banks Win as Congress Overrides the CFPB Rule Banning Class Action Waivers in Arbitration Agreements, 22 N.C. Banking Inst. 165 (2018). Available at: http://scholarship.law.unc.edu/ncbi/vol22/iss1/11 This Note is brought to you for free and open access by Carolina Law Scholarship Repository. It has been accepted for inclusion in North Carolina Banking Institute by an authorized editor of Carolina Law Scholarship Repository. For more information, please contact . Populist Conundrum: Big Banks or Plaintiffs’ Bar? Banks Win as Congress Overrides the CFPB Rule Banning Class Action Waivers in Arbitration Agreements I. INTRODUCTION Americans have distrusted ambulance-chasing plaintiffs’ attorneys and money-hungry financial service providers for years. 1 The Consumer Financial Protection Bureau’s (“CFPB” or “the Bureau”) Final Rule on Arbitration Agreements (“Final Rule”) pitted these two groups against each other. 2 The CFPB exercised its authority to limit or prohibit the use of pre-dispute arbitration agreements granted by Section 1028(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) by publishing the Final Rule to the Federal Register on July 19, 2017.3 The Final Rule prohibited the use of arbitration agreements that bar consumers from participating in class actions, but did not prohibit the use of arbitration altogether. 4 The rule became effective on September 18, 2017, and would have applied to contracts entered into 1. See Nicholas M. Gess et al., Christmas in July for Plaintiffs Bar—CFPB Arbitration Rule to Take Effect, NAT’L L. REV. (July 14, 2017), https://www.natlawreview.com/article/ christmas-july-plaintiffs-bar-cfpb-arbitration-rule-to-take-effect (“All of these eventualities must be viewed against a political backdrop in which the significant concerns of the business community about the Rule will run up against a federal agency that has substantial support from consumers who are constituents and voters, and who harbor a strong distrust of the financial services sector.”); Kenny Stein, Stop President Obama’s Trial Lawyer Giveaway, FREEDOM WORKS (June 27, 2016), http://www.freedomworks.org/content/stop-presidentobamas-trial-lawyer-giveaway (urging readers of a conservative blog to submit public comments on the CFPB’s Proposed Rule). 2. See Arbitration Agreements, 12 C.F.R. § 1040.4 (repealed 2017) (limiting arbitration agreements to exclude class action waivers and establishing a monitoring provision to allow the CFPB to continue observing the use of arbitration in consumer financial services). 3. Arbitration Agreements, 82 Fed. Reg. 33210, 33320 (July 19, 2017) (codified at 12 C.F.R. § 1040); 12 U.S.C. § 5518(b) (2016) (“The Bureau, by regulation, may prohibit or impose conditions or limitations on the use of an agreement between a covered person and a consumer for a consumer financial product or service providing for arbitration of any future dispute between the parties, if the Bureau finds that such a prohibition or imposition of conditions or limitations is in the public interest and for the protection of consumers.”). 4. 12 C.F.R. 1040.4 (repealed 2017). 166 NORTH CAROLINA BANKING INSTITUTE [Vol. 22 after March 19, 2018.5 However, the Final Rule was short-lived. 6 Congress used the Congressional Review Act (“CRA”)7 to overturn the rule when the Senate passed a resolution of disapproval by a narrow 5150 vote on October 24, 2017, with Vice President Mike Pence voting as the tie breaker.8 The Final Rule would have provided a valuable tool to improve private enforcement through litigation by allowing consumers to bring class actions against financial service providers.9 Additionally, the monitoring provision would have increased transparency in the arbitration process to further aid in the Bureau’s mission for consumer protection and keep the opportunity to expedite claims through arbitration open for consumers who still wish to use it.10 However, concerns about the costs to the financial services industry and poor popular opinions of class action lawyers ultimately led to the demise of the Final Rule. 11 This Note examines the Final Rule and concludes that, despite some flaws, it would have helped consumers and evened the playing field between consumers and financial service providers. Part II provides a brief overview of the decades-long debate over the practice of arbitration.12 Part III analyzes the Final Rule in conjunction with the Arbitration Study (“the Study”) and argues for why it was ultimately good for consumers.13 Part IV examines the political climate in which the Final Rule went into effect and the imperfections that led to its repeal. 14 Part V briefly summarizes and concludes the Note. 15 5. Arbitration Agreements, 82 Fed. Reg. at 33210. 6. Ian McKendry, Senate Votes to Repeal CFPB Arbitration Rule in Win for Financial Institutions, AM. BANKER, Oct. 24, 2017, at 1. 7. Congressional Review Act, 5 U.S.C. § 802 (2016) (allowing both houses of Congress to pass a joint resolution of disapproval of agency rulemaking to repeal a final rule). 8. Ian McKendry, supra note 6, at 2. 9. 12 C.F.R. § 1040.4(a). 10. Id. § 1040.4(b). 11. McKendry, supra note 6, at 3 (quoting Sen. John Cornyn saying, “There is no reason for us to enrich a class of lawyers who . . . bring these lawsuits and see consumers getting pennies on the dollar, which is what the status quo would permit . . . .”). 12. See infra Part II. 13. See infra Part III. 14. See infra Part IV. 15. See infra Part V. 2018] ARBITRATION AGREEMENTS 167 II. BACKGROUND ON THE ARBITRATION DEBATE A. Protections of Arbitration Agreements in the United States The Federal Arbitration Act of 1925 (“FAA”) made arbitration agreements in contract-related disputes valid and enforceable “save upon such grounds as exist at law or in equity for the revocation of any contract.”16 Over the years, arbitration has become a contentious practice, particularly when pre-dispute arbitration clauses are written into contracts between parties with unequal bargaining power.17 Issues arise when consumers are locked into shrinkwrap agreements without knowing they are agreeing to resolve any disputes against the company through arbitration—in which the normal rules of evidence, discovery, and appeals are surrendered in favor of a quick and private proceeding. 18 One of the most controversial aspects of standard arbitration agreements is that many involve class action waivers, preventing consumers from joining together to litigate claims that (...truncated)