Challenging The CFPB Arbitration Rule


Donald J. Querio

The financial services industry is bracing for the formal release by the Consumer Financial Protection Bureau (“CFPB”) of its proposed arbitration rule, which is aimed at reversing the long line of United States Supreme Court precedent holding that the Federal Arbitration Act (“FAA”) trumps class actions.  For many, the only questions are when the rule will be issued (answer: after the CFPB at least pretends to sort through the 14,000 comments it received), and, once released, what the effective date will be.  The simple answer to the second question is—the rule will cover contracts entered into 210 days after the publication of the final rule in the Federal Register.  But this ignores a more fundamental issue of whether the rule will survive the inevitable challenges it will face, some attacking the CFPB as currently constituted, and others involving the particulars of the rule itself.  Some of the challenges have already been launched and others will be as soon as the rule is published.  The surprise result of the recent national election has improved the chances that those challenges will succeed.  Here is a sampling of the hurdles that the CFPB will face in enforcing its new rule.

Is The CFPB Constitutional?  First, there is a serious question whether the CFPB, as currently structured, violates the separation of powers doctrine by vesting all of its authority in a single director.  Executive branch agencies are generally answerable to the President, and must submit their regulations to the Office of Management and Budget in the Executive Office of the President for review before issuing them.  Independent regulatory agencies generally are headed by a bipartisan commission, whose members are appointed to specific terms by the President, and confirmed by Congress.  By contrast, the CFPB’s Director—who has final say in all rulemaking and enforcement actions—serves a fixed five-year term and can be removed by the President only for cause.  Likewise, the Director is not subject to Congressional scrutiny through the appropriations process because of the CFPB’s peculiar funding provisions in its enabling statute, the Dodd-Frank Act.  The CFPB’s budget is paid from the Federal Reserve System’s operating expenses, and Congress is prohibited from reviewing the Director’s budget submission to the Federal Reserve.  No other federal agency is funded in such attenuated fashion.

There are already three separate lawsuits winding their way through the federal courts that raise constitutional challenges to the CFPB.  One of the first was brought in 2012 by State National Bank of Big Spring, Texas, in the United States District Court for the District of Columbia challenging, among other things, the CFPB’s single-director structure.  The district court dismissed the initial complaint for lack of standing.  But the District of Columbia Circuit Court of Appeals reversed, holding that the bank has standing to challenge the CFPB’s constitutionality as a regulatory agency even though the CFPB had not yet subjected the bank to a threatened enforcement action.  State National Bank of Big Spring v. Lew, 795 F.3d 48 (D.C. Cir. 2015).

Similarly, in 2015 Intercept Corporation filed an action in the United States District Court for the District of North Dakota raising the single-director challenge to a pending $12 million administrative claim by the CFPB.  According to the complaint, in an effort to force a settlement, the CFPB staff told Intercept that the Director had already reached a decision about its case before the administrative proceeding was commenced.  As in the State National Bank action, the CFPB recently filed a motion to dismiss on the ground that Intercept does not have standing to challenge the agency’s constitutionality other than through the administrative proceeding itself.  Not surprisingly, Intercept has cited the D.C. Circuit’s decision in State National Bank of Big Spring in opposition to the CFPB’s motion.  Intercept Corp. v. CFPB, No. 3:2016cv00118 (D.N.D. 2016)

Finally—saving the best for last—PHH Corporation filed an action in 2012 against the CFPB that has reached the D.C. Circuit on the merits of the constitutionality question.  PHH Corp. v. CFPB, 839 F.3d 1 (D.C. Cir. 2016).  The PHH Corp. action began as an appeal of a $109 million penalty imposed by the CFPB Director for violation of the Real Estate Settlement Procedures Act (“RESPA”), that was more than 18 times greater than the $6 million amount recommended by the CFPB’s administrative law judge.  PHH’s response included a challenge to the Director’s lack of accountability to either the President or the Congress.  In a landmark ruling, the D.C. Circuit sustained PHH’s challenge and struck the statutory provision requiring a showing of cause for the President’s removal of the Director.  Id. at 37.  To no one’s surprise, the CFPB recently sought en banc review of that decision.

What did come as a surprise to most pollsters was President Trump’s victory and the continued control by Republicans of both houses of Congress.  It is possible that President Trump will attempt to remove the current Director for cause under the statute or, in the alternative, without cause based on the PHH decision.  If the current Director objects to his removal, it will at a minimum throw the legitimacy of any action by him into question.  How this will affect the CFPB’s proposed arbitration rule remains to be seen, but suffice it to say that the long-term prospects for the rule do not look bright.

Can The CFPB Rule Trump The FAA?  The United States Supreme Court has held that the FAA mandates the enforcement of bilateral arbitration clauses with class action waivers.  See AT&T Mobility, LLC v. Concepcion, 563 U.S. 333 (2011).  The high Court has also recently reaffirmed in CompuCredit Corp. v. Greenwood, 132 S. Ct. 665, 673 (2012), that Congress can, if it does so explicitly, exempt certain claims from arbitration.  The CFPB rule, if issued in final form, will create such an exception to the FAA for financial services contracts, without any further action by Congress.  The CFPB claims that this power to act for Congress is embedded in its enabling statute, the Dodd-Frank Act.

Yet, there is a serious constitutional question whether Congress can delegate its power to amend the FAA to an agency and, in the process, overturn the Supreme Court’s interpretation of that statute.  A recent concurrence by Justice Thomas points out that English law as adopted by the Founders in the Constitution precludes the executive branch or one of its agencies from making, altering or suspending statutes—that power is reserved to the legislative branch of government alone.  Dept. of Trans. v. Assoc. of American Railroads, 135 S. Ct. 1225, 1241-42 (2015)  (Thomas, J. concurring) (citing P. Hamburger, Is Administrative Law Unlawful?, at 33–34 (2014)).  Applying this ancient rule to the present case, it will be argued that only Congress, and not the CFPB, can create exceptions to the FAA.

Whether this argument succeeds will depend on whether the Dodd-Frank Act violated the so-called non-delegation rule.  The Supreme Court has repeatedly held that “when Congress confers decision making authority upon agencies, Congress must lay down by legislative act an intelligible principle to which the person or body authorized to [act] is directed to conform.”  See, e.g., Whitman v. American Trucking Associations, Inc., 531 U.S. 457 (2001).  Section 1028(b) of the Dodd-Frank Act allows the CFPB to regulate arbitration to the extent that “prohibition or imposition of conditions or limitations [on arbitration] is in the public interest and for the protection of consumers.”  Although the courts have rarely found a Congressional delegation wanting, the Dodd-Frank delegation standard pushes the limit.  It amounts to no more than a mandate to protect the public and do right by consumers.  Whether such a nebulous delegation stands may well have to be resolved by the Supreme Court.

Once again, the recent election has added a new arrow to the quiver of those in Congress who believe that the CFPB has overstepped its bounds with its proposed rule.  The Congressional Review Act (5 U.S.C. §§ 801, et seq.), which was enacted in 1996, gives Congress the power by joint resolution to disapprove any regulation promulgated by a federal agency.  The resolution must be passed within 60 legislative days of the regulation’s adoption and must be signed by the President.  When such a resolution was enacted during the Obama Administration, it was vetoed by the former President.  Now that President Trump has been sworn in, a Democratic filibuster in the Senate seems the main impediment.  If such a resolution is passed, it is highly likely that President Trump will sign it, which will sound the death knell of the CFPB’s rule.

Does The CFPB’s Study Support The Arbitration Rule?  The Dodd-Frank Act required the CFPB to study the effects of mandatory arbitration and, if the agency found that the practice harmed consumers, to write rules to restrict it.  The resulting 728-page study, published in April 2015, attempted to make up in volume for what it lacked in substance.  In fact, the CFPB’s study largely ignored arbitration, focusing instead on the alleged benefits to consumers of class actions.  The study concluded that in comparison to the millions of consumers who involuntarily were designated class members, few consumers actually pursue arbitration.  On that basis alone, the CFPB contends that mandatory pre-dispute individual arbitration harms consumers and supports its proposed rule banning class waivers in arbitration agreements.

The findings of the CFPB have been criticized for focusing on the purported benefits of class actions rather than the actual merits of arbitration in resolving consumer disputes.  For example, the findings simply brush aside data showing that consumers who chose to pursue arbitration recovered an average award of $5,389, slightly higher than the comparable average recovery in small claims actions.  The study also ignored the fact that the largest providers of arbitration services, including the American Arbitration Association (“AAA”) and Judicial Arbitration and Mediation Services, Inc. (“JAMS”), have rules limiting the out-of-pocket costs a consumer has to bear (for example, $125 at AAA, with a possible waiver for hardship), and that those costs were recoverable where the consumer prevailed.

The CFPB study instead offers gross figures showing the supposed benefit of class actions to the public.  For example, the CFPB claims that of the class action settlements it studied, 34 million consumers had the potential to receive $1.1 billion.  Assuming that every class member actually recovered something, an unrealistic assumption given the low rate of claims in claims-made settlements, the average recovery would be less than $35.  The only meaningful dollar figure revealed by the study was the total attorneys’ fees recovered by class counsel in these cases, a startling $424,495,451.  As any attorney who has practiced in the class action arena knows, the recovery of attorneys’ fees is what consumer class actions are really all about.

Finally, what the CFPB study really misses is that arbitration is in its infancy and, even so, has shown itself as the only serious alternative to the bloated, fee-driven class action process that has done so much to sour the public on the justice system in the country.  It is clear that the goal of the CFPB rule is to strangle arbitration in its crib and enshrine class actions as the sole vehicle for redressing consumer complaints.  One does not have to look beyond the title of the CFPB’s press release announcing the study to know that it was not a balanced effort:  “CFPB Study Finds That Arbitration Agreements Limit Relief For Consumers.”  The financial services industry has a strong argument that this study does not satisfy Congress’s mandate in the Dodd-Frank Act.

Is The CFPB Rule An End-Run Of The Dodd-Frank Exemption For Auto Dealers?  Under an explicit exemption of the Dodd-Frank Act, the CFPB does not have jurisdiction over automobile dealers.  12 U.S.C. § 5519(a).  Through their finance and insurance departments, those dealers offer an assortment of financial services to their customers, including installment contracts and lease financing.  The intent of Congress was clearly to leave the existing federal and state regulation of this industry unimpaired and beyond the reach of the CFPB.  Arbitration contracts between such dealers and their customers should not be disturbed.

The CFPB rule ignores the spirit, if not the letter, of the auto dealer exemption.  Section 1040.4(a)(2) of the proposed rule provides that covered providers cannot rely on any noncompliant arbitration clause, even if the contract was not originally entered into between a consumer and a covered person.  As a result, virtually any contract or lease acquired by a financial institution will become subject to the rule, even though it was not when originated.  Indeed, the proposed rule requires a covered person who takes assignment of a noncompliant contract to send the consumer a notice renouncing the ability to force class actions into arbitration.

Financial services companies will have to decide whether to comply with these provisions while challenging them in court.  But compliance carries other problems, including confusing the public as to the dealer’s right to compel arbitration in lieu of a class action.  Frequently, class actions are commenced against the originating dealer as well as the financial institution(s) that have purchased that dealer’s paper.  Even if the CFPB rule is enforceable against the financial institution following assignment of such paper, the dealer should arguably still be able to enforce the arbitration agreement.  Perhaps the CFPB will take the position that the arbitration agreement is altered for all purposes upon assignment.  The proposed rule provides no guidance on the subject.

The sensible approach will be to exempt all financing contracts entered into by dealers, irrespective of whether they are later assigned or not.  Only in that way will Congress’s attempt to screen auto dealers from the reach of the CFPB be realized.

For more information on the CFPB’s arbitrations rule, please contact Donald J. Querio at or Erik Kemp at

© 2017, Severson & Werson. All rights reserved.