Treasury Criticizes CFPB Arbitration Rule

Steven Lofchie Commentary by Steven Lofchie

The U.S. Department of the Treasury ("Treasury") released a report ("Report") criticizing the Consumer Financial Protection Bureau's ("CFPB") arbitration rule ("Rule"). The Rule restricts mandatory arbitration clauses in certain consumer financial contracts. The Rule works by (i) restricting providers from using pre-dispute arbitration agreements that prohibit class action lawsuits, (ii) mandating that providers include language in their arbitration agreements that reflects this limitation, and (iii) imposing requirements that providers submit records related to pre-arbitration agreements to the CFPB for monitoring purposes.

Under the Rule, companies still would be able to include arbitration clauses in their contracts for the resolution of individual disputes. However, in contracts that are subject to the rule, the clauses would have to contain language stating explicitly that they could not be used to stop consumers from being part of class actions in court.

In the Report, Treasury claimed that the CFPB did not appropriately consider whether the Rule would promote customer protection or benefit the public. Instead, Treasury said, the review process undertaken by the CFPB to consider the potential effects of the rule was wholly inadequate. In particular, Treasury argued that:

  • the Rule is expected to generate more than 3,000 additional class action lawsuits that will impose heavy costs on businesses, and these costs will be passed on to consumers in the form of higher borrowing expenses;
  • class action lawsuits do not often result in recovery for most plaintiffs, and affected plaintiffs rarely claim settlement funds when awarded;
  • plaintiffs' attorneys will receive a financial windfall from the resulting uptick in class-action suits;
  • the CFPB failed to consider whether an improved disclosure regime would benefit consumers more than an outright ban on mandatory arbitration clauses;
  • the CFPB failed to consider the amount of class-action suits that lack merit; and
  • the CFPB had no basis for its claim that the Rule would increase compliance with federal consumer finance laws.

Treasury contended that the CFPB Rule "would upend a century of federal policy favoring freedom of contract to provide for low-cost dispute resolution." According to Treasury, the CFPB conducted a sub-standard analysis of the Rule before adopting it, and did not show that the Rule will have tangible benefits for consumers.


This may be viewed as a dispute between Obama-holdover regulators who favor "retail" customers and the new Trump regulators who favor "institutions." More cynically, this may be viewed not so much as protecting "retail" investors as it is throwing a potentially nice-sized bone to class-action lawyers.

The Treasury should be concerned with the risk to individual banks that is posed by class-action lawsuits. If small banks start getting hit with class-action lawsuits that are expensive to defend or settle, both Congress and the FDIC are likely to regret this rulemaking. Let's see what happens when a small bank is put under real financial stress by being named in a class-action suit.

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