CFPB arbitration rule draws industry ire, but some predict it won't take effect

July 13, 2017

The Consumer Financial Protection Bureau's arbitration rule, issued Monday, could put dealerships and auto lenders at risk for class-action lawsuits. But some experts questioned whether the rule will ever take effect, while various industry associations quickly issued statements denouncing the rule.

The rule prohibits banks and other financial services companies from including mandatory arbitration clauses in contracts. Doing so effectively stops consumers from pursuing claims of wrongdoing via class-action lawsuits by forcing consumers to seek relief through individual arbitration cases.

If the rule takes effect, lenders would be prohibited from having arbitration clauses with class-action waivers in indirect auto-finance contracts, said Randy Henrick, an attorney specializing in consumer protection laws and auto dealer sales and F&I compliance.

"If that's the case, then both the lender and the dealer would be subject to class action for something in the contract or something the dealer uniformly does," he said.

Michael Benoit, chairman at the Hudson Cook law firm, said the rule affects lenders directly, and dealers indirectly, "but the result is kind of the same."

For a dealership, a class action would be much smaller than for a lender because the class would include only the dealership's finance customers. "For the lenders, it's huge because they're buying from many, many, many dealers," he said.

Consumer advocates want to target lenders most of all, Benoit said. They have "deep pockets" and a group that expands nationwide, rather than a smaller group of dealership customers, so a class action could represent a vast number of people.

"There's much more appeal to go after" lenders, he said. If the plaintiffs' attorneys are choosing between going after the dealership or the captive, they will most likely choose the captive, he said.

Congressional action?

Henrick and others expect the rule to face many roadblocks.

"The rule was so absolute and sweeping that it invites challenges on multiple fronts," Henrick said. "I don't believe this will see the light of day."

But even critics of the rule said getting it overturned or rolled back likely won't happen immediately, unless Congress gets involved. Even if CFPB Director Richard Cordray is fired or resigns before his term ends next year, there must be a notice and comment period to roll back a rule, Benoit said. A new director appointed by the Republicans couldn't immediately reverse it, he said.

Henrick said he doubts the rule will ever take effect because Congress can refer to the Congressional Review Act, which allows it to undo any regulation by a federal agency. Or the rule could be effectively overturned by passage of a bill, such as the House Financial Services Committee's Financial Choice Act, which would make the CFPB subject to Congressional oversight.


"Dealers need to mobilize; finance companies need to mobilize; trade associations need to mobilize and really bang on Congress to use their authority to overturn it," Benoit said.

Revoking this rule is something Congress would likely agree on, he added.

If Congress doesn't overturn the rule large lenders, trade associations or other agencies such as the U.S. Chamber of Commerce may litigate for injunctive relief.

"I think what the consumer advocates are relying on and what the CFPB is relying on is that there's been enough scandal by large financial institutions recently that Republicans are going to be reluctant to put themselves at electoral jeopardy by overruling the CFPB," he said.

With Republicans in relatively safe seats in the House, Benoit says they are unlikely to be reluctant.

"Those who are in questionable seats, does it become a factor in the re-election campaign? Sure, but a major factor? Probably not, because there are plenty of other things to harp on, like health care and tax reform," he said.

"For a Congress that has had a very difficult time getting anything done, this is something they could do with 51 votes in the Senate," Benoit said. "I think that's the best hope for undoing it."

Industry reactions

Several automotive and finance industry groups expressed their dissatisfaction with the CFPB's rule.

"We are disappointed that the Bureau has decided to move forward with a final rule," Bill Himpler, executive vice president of the American Financial Services Association, said in a statement. "The Bureau has ignored its mandate under the Dodd-Frank Wall Street Reform and Consumer Protection Act to limit arbitration only if such a prohibition is in the public interest and for the protection of consumers."

Steve Jordan, CEO of the National Independent Automobile Dealers Association, said in an emailed statement that the rule was "ill-conceived."

"Arbitration has proven to be a faster, less expensive and more effective means of resolving consumer disputes than class-action lawsuits. And consumers who receive an award in arbitration almost always receive more than they would in a class-action lawsuit," he said, citing the CFPB's own research.

Consumer Banking Association CEO Richard Hunt said the group encourages Congress "to move swiftly and overturn this anti-consumer rule."

A spokesman for the National Automobile Dealers Association said NADA is still reviewing the rule.


How might the rule affect a dealership in practice?

A truth-in-lending violation could result in a class action, rather than an arbitration session, Henrick said. For example, if financing customers paid a higher price than a cash customer because the former were not creditworthy enough to get the lower price, the finance charge creates a price difference and must be disclosed in the contract and added to the interest rate.

Dealers and lenders sometimes don't include that in the contract when they should, he said. That sort of class action would likely be against the lender, Henrick said, but the lender would probably hold the dealership responsible. ​

Third-party aftermarket contracts must also be itemized in the contract, not included in the price of the vehicle, but dealers often do not itemize that information, which is a truth-in-lending violation, he said.

Said Henrick: "Even a frivolous class action could cost a fortune to defend."