Financial Regulatory Report

The CFPB’s Arbitration Agreements Rule (“Rule”), which was finalized on July 18, 2017, came under fire today in a report released by the U.S. Department of Treasury (“Treasury”).  The 18-page report details the “extraordinary costs” the Rule will impose if implemented—more than $500 million in additional legal defense fees, $330 million in payments to plaintiffs’ lawyers, and $1.7 billion in additional settlements.  The report is a complete takedown of the CFPB’s years-long efforts concerning arbitration, questioning the CFPB’s 2015 Congressionally-mandated arbitration study, the data relied on by the Bureau, and the CFPB’s overall analysis of arbitration-related information. In addition to a detailed criticism of the costs imposed by the Rule, Treasury’s study highlighted other defects:
    • According to the Bureau’s own data, class members obtain no relief in the vast majority of consumer class actions.
    • When class relief is ordered, only a few affected consumers actually pursue settlement funds.
    • Plaintiffs’ attorneys will be the biggest beneficiaries of the Rule, which Treasury characterized as a “large wealth transfer” to those lawyers.
    • More prominent disclosures concerning arbitration would benefit consumers more than a ban—an avenue the Bureau failed to seriously consider.
    • The Bureau also overlooked the costs of meritless litigation that the Rule will generate.
    • The Bureau asserted that the Rule will improve compliance with federal consumer financial laws but offered nothing to credibly support this claim.
The Rule continues to be controversial and its future remains uncertain. The Senate could nullify the Rule by a simple majority vote pursuant to the Congressional Review Act, a move that is fully supported by the Trump administration.  In addition, on September 29, 2017, several industry associations and chambers of commerce filed a lawsuit in federal court challenging the Rule.  Finally, on September 20, 2017, the Office of the Comptroller of the Currency released its own report critiquing the Rule, and the acting comptroller has engaged in an ongoing, public dispute with the CFPB director over the potential impacts of the Rule and the research on which it was based. Reed Smith will be watching these efforts closely and will provide relevant updates as they arise.