WASHINGTON (Legal Newsline) – As the director of a federal consumer protection agency seemingly fights for his job, he has gone forth with plans to finalize a controversial rule – and a court challenge seems imminent.
On July 10, the Consumer Financial Protection Bureau announced the rule, which targets contracts offered by the financial services industry (for example, credit card companies and banks) that prevent customers – and plaintiffs attorneys - from filing class action lawsuits.
Those class action waivers send disputes between companies and consumers to arbitration. In 2015, the CFPB told Congress that consumers are being shortchanged in the process.
"These clauses allow companies to avoid accountability by blocking group lawsuits and forcing people to go it alone or give up. Our new rule will stop companies from sidestepping the courts and ensure that people who are harmed together can take action together,” said the CFPB’s director, Richard Cordray.
A lawsuit challenging this rule is very likely, according to Ballard Spahr’s Alan Kaplinsky, who heads the firm’s Consumer Financial Services Group. He also pioneered the use of pre-dispute arbitration provisions in consumer contracts.
Kaplinsky, who has written extensively on the rule, says he is aware of organizations or companies considering a lawsuit but is not at liberty to disclose their names. He says a challenge is "very likely."
“The CFPB has decided to overstate the value of class actions for consumers, contrary to the CFPB’s own data in its study, which demonstrates unequivocally that the only real beneficiaries of class action litigation are the plaintiffs’ class action lawyers,” he told Legal Newsline.
“This rule is just a large gift for class action lawyers.”
Cordray has been the director of the CFPB since it was created earlier this decade by the Dodd-Frank Wall Street Reform and Consumer Protection Act. He was appointed by President Barack Obama after previously serving as the Democratic attorney general of Ohio.
A federal appeals court is currently deciding whether President Donald Trump can replace Cordray. PHH Corporation challenged a $109 million penalty levied against it over an alleged kickback scheme.
According to the provisions of Dodd-Frank that created the position, the director of the CFPB can only be removed for inefficiency, neglect of duty or malfeasance. PHH says this is unconstitutional, and a three-judge panel from the U.S. Court of Appeals for the District of Columbia agreed in October.
In May, the entire roster of D.C. Circuit judges heard oral arguments as it reconsiders the case. The United States government has even asked the court to find the agency’s structure is unconstitutional, which would allow Trump to replace Cordray if he wants to.
“In sum, a removal restriction for the director of the CFPB is an unwarranted limitation on the President’s executive power,” says the United States’ brief, submitted in March.
A final decision in favor of PHH (the lawsuit still might end up before the U.S. Supreme Court) could be disastrous for Cordray’s legacy. In fact, Kaplinsky says it could erase it entirely.
“I would think that it would invalidate any action that he has taken,” Kaplinsky said.
Kaplinsky has argued that the CFPB is off-base in its assertion that class action lawsuits favor consumers, arguing that the CFPB’s own study shows arbitration is more effective.
The study showed the average recovery for a consumer who prevails in arbitration is more than $5,000, while the average class action settlement provides only $32 while attorneys pocket more than $424,000, on average.
But the ability for plaintiffs to join together in a class action is important, Cordray feels. Class action waivers deny consumers their day in court, help companies avoid paying out refunds and allow them to continue harmful practices, the CFPB says.
“Arbitration clauses in contracts for products like bank accounts and credit cards make it nearly impossible for people to take companies to court when things go wrong,” he says.
Should the rule make it past any court challenges – and if Cordray’s actions aren’t invalidated by the PHH case – companies will need to get used to the courtroom.
“(The CFPB) did this knowing that banks and other companies would abandon the use of individual arbitration because the costs will be too high to maintain it and also absorb the high costs of defending class actions,” Kaplinsky said.
“And, make no mistake, the costs, according to the CFPB, could exceed $5 billion in the first year alone.”
The rule’s effective date is 60 days following publication in the Federal Register and applies to contracts entered into more than 180 days after that. A court challenge would seek an injunction preventing the rule from taking effect.