Close vote in the U.S. Senate to overturn CFPB arbitration rule

As the WANADA Bulletin reported last week, the Senate voted 51-50 (with Vice President Mike Pence breaking the tie) to overturn the Consumer Financial Protection Bureau (CFPB)’s arbitration rule. The House passed the bill in July to overturn the rule, with President Trump now expected to sign the legislation into law. What does all this mean for dealers, and how was such a close vote able to pass?

The CFPB rule would have allowed consumers to band together to file class action suits, and a clause would be required in financial contracts stating that. Currently, most contracts–from those with mobile phone companies to loan contracts from financial institutions of all sizes–include a clause that the consumer must agree to settle all disputes through arbitration. Now those arbitration clauses can and will remain.

The CFPB is explicitly prevented from regulating dealers, and under the arbitration rule financial institutions had to include language stating that the ban on class action suits did not apply to franchised auto dealers. But under the rule, that ban on consumer class actions did apply to the financial institutions dealers use for loans and leases. That means that dealers would face indirect liability as a result of the master agreements they sign with finance and lease sources.

The business community at large opposed the arbitration rule, saying that it was based on a flawed study and would benefit trial lawyers more than it would consumers. The U.S. Chamber of Commerce and other business groups sued the CFPB over the rule. The Chamber called the rule “a prime example of an agency gone rogue.”Republicans in Congress have opposed the CFPB since its creation in 2010. But Congress was on deadline if it wanted to overturn the arbitration rule. Republicans decided to use the Congressional Review Act, which says Congress may overturn any agency rule within 60 working days of its passage with a plurality vote instead of the veto-proof 60-vote majority required for most legislation.

It was clear it could be a close vote and tough sell in the Senate when Democrats invoked the image of scandal-plagued Wells Fargo and Equifax profiting from the bill. The tipping point came when the Treasury Department released a report critical of the CFPB rule one day before the vote. Dealer attorney Michael Charapp of Charapp and Weiss, LLP, said the report “provided coverage certain Senators needed to support the resolution.” Some key points in the Treasury Department report were these:

• The CFPB estimated that 3,000 additional class action suits would be brought in the next five years. The Treasury report said those suits would cost $500 million in additional legal defense fees, $330 million in payments to plaintiffs’ lawyers and $1.7 billion in additional settlements.
• The extra costs to the businesses would be passed on to consumers.
• In 87 percent of class action cases, either no plaintiffs or only named plaintiffs receive relief. We will let President Trump have the last word: “By repealing this rule, Congress is standing up for everyday consumers and community banks and credit unions, instead of the trial lawyers, who would have benefited the most from the CFPB’s uninformed and ineffective policy,” he said in a White House statement.

Thanks to Michael Charapp, Esq. for providing some of the information in this article.