The enforceability of arbitration clauses in financial contracts took a hit from the Consumer Financial Protection Bureau (the “CFPB”) this week, but threatened congressional action may undo the effects of the CFPB’s newest regulation before it takes effect.

The CFPB Rule

 On Monday, July 10, the CFPB issued its final rule limiting pre-dispute arbitration agreements in certain financial contracts, in an effort to strengthen financial consumers’ access to class actions. The rule, codified at 12 CFR part 1040, imposes several requirements on providers of certain financial services, including extensions of consumer credit, participating in credit decisions, and referring applicants for consumer credit to creditors:

(1) The provider is prevented from relying on pre-dispute arbitration agreements with respect to class actions until the presiding court in the dispute has ruled that the case may not proceed as a class action;

(2) The provider must include language in its pre-dispute arbitration agreement preserving the consumer’s rights to a class action and notifying the consumer of the same; and

(3) If the provider enters into a pre-dispute arbitration agreement, the provider must provide certain records to the CFPB, including:

(A) Information regarding any claims or counterclaims that may arise (the claim/counterclaim, the answer thereto, the arbitration agreement, and the judgment issued by the arbitrator);

(B) Communications from the arbitrator to the provider that the agreement does not comply with the arbitrator’s fairness principles;

(C) Any submission to a court that relies on a pre-dispute arbitration agreement in support of the provider’s attempt to seek dismissal, deferral, or stay of any aspect of the case; and

(D) Any such agreement relied upon in (C) above.

The CFPB implemented its arbitration rule pursuant to Section 1028 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), under which Congress specifically authorized the CFPB to implement rules limiting arbitration agreements if the CFPB found that such limitations were in the public interest. In implementing the new rule, the CFPB followed the example of other sections of Dodd-Frank that directly limit arbitration agreements in certain circumstances (e.g., Section 1414(e), which prohibits the use of arbitration clauses in connection with mortgage loans).

Response from the Banking Industry

 The banking industry’s response to the arbitration rule has been, unsurprisingly, overwhelmingly negative. Independent Community Bankers of America President and CEO Camden R. Fine remarked that “[i]t isn’t economically feasible under the new rule for community banks to . . .  carry the high legal costs associated with class-action lawsuits,” also voicing concerns that “the collection and possible dissemination of arbitral data . . . could lead to the re-identification of consumers and the release of sensitive personal and financial information.” American Bankers Association President and CEO Rob Nichols decried the rule as putting “class action lawyers – rather than consumers – first.”

Congressional Pushback and the CRA

 Congressional Republicans have also been vocal in their opposition to the new regulation. Senator Tom Cotton (R-Arkansas), a member of the Banking Committee, announced a plan on Tuesday to draft a resolution to reverse the arbitration rule by means of the Congressional Review Act (the “CRA”). Cotton is joined in his CRA challenge to the arbitration regulation by Congressman Jeb Hensarling (R-Texas), the Chairman of the House Financial Services Committee. The CRA allows for Congress to repeal a federal regulation, within 60 days of its approval, by the vote of a simple majority vote of both houses and approval of the President. Such repeal would also block the CFPB from issuing similar rules in the future. The current 115th Congress has exercised its authority under the CRA to remove fourteen regulations since taking office in January, but has not yet used the CRA to successfully repeal a CFPB regulation (an effort earlier this year to repeal a CFPB regulation pertaining to prepaid cards failed to pass either house).

Absent a reversal by Congress, the CFPB’s arbitration rule will take effect 60 days after publishing in the Federal Register and will apply to pre-dispute arbitration agreements starting 181 days thereafter.