A group of more than twenty finance industry organizations filed suit against the Consumer Financial Protection Bureau. Their goal is to halt the implementation of the bureau’s new arbitration rule, which was finalized earlier this year.
The arbitration rule forbids providers of consumer financial products from including clauses in their contracts that prevent consumers from joining together in a class action to sue their bank or financial company. The CFPB explained that this new rule is meant to deter wrongdoing by ensuring the right of consumers to band together in a class. The finance industry argues that arbitration clauses save consumers money by removing the possibility of a potential class action lawsuit, which are often extremely costly.
In their complaint, the organizations challenge the “constitutionality and legality” of the rule and claim that it is “invalid and should be set aside.” The organizations cite four reasons.
First, the complaint argues that the rule is the product of, and is fatally infected by, the unconstitutional structure that Congress gave the CFPB when it created the bureau in the Dodd-Frank Act. The single director, removable only for cause, makes the bureau unaccountable, the complaint argues. Also, its funding structure, which removes the CFPB from the usual appropriations process, is Constitutionally problematic.
Additionally, the rule violates the Administrative Procedure Act (APA) which requires an agency to seek, accept and apply input from the public. The complaint alleges that the CFPB failed to observe procedures required by law when it adopted the conclusions of “a deeply flawed study” that improperly limited public participation, applied “defective methodologies,” misapprehended the relevant data, and failed to address key considerations.
Further, the rule allegedly also violates the APA by running counter to the record before the bureau and fails to take into account important aspects of the problem it purports to address. The complaint says this makes the rule “the very model of arbitrary and capricious agency action.”
Finally, the rule violates the Dodd-Frank Act because, the complaint alleges, it fails to advance either the public interest or consumer welfare for which the act was created. The organizations claim that the rule precludes arbitration, a dispute resolution mechanism that generally benefits consumers, and instead elevates class-action litigation that typically does not.
The CFPB has yet to respond to the complaint. Outside of the finance industry challenging the rule, Congress is also in the process of potentially overturning the rule. The Senate may vote on repealing the arbitration rule yet this year.