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*UPDATE: On July 31, 2017, Acting Comptroller of the Currency Keith Noreika released a statement stating that he would not petition the FSOC to stay the effective date of the Arbitration Rule.

On Monday, July 10, the Consumer Financial Protection Bureau (the “CFPB”) released its Arbitration Agreements Rule (the “Arbitration Rule”). The Arbitration Rule prohibits providers of covered products and services from using pre-dispute arbitration agreements that bar consumers from filing class action lawsuits.  By July 20, however, measures to repeal the Arbitration Rule were introduced by lawmakers in both the House and Senate.

What does this challenge mean?

The Congressional Review Act permits Congress to nullify regulatory rules issued by federal agencies. To do so, a joint resolution disapproving an agency’s final rule must be introduced within 60 legislative days of Congress’ receipt of the rule. Such resolutions require a majority vote to pass both Houses to proceed to the President for signature.  If approved by the President, the final rule is nullified and will not go into effect. The agency is also prevented from reissuing a new rule in substantially the same form without specific authorization from Congress. If the President vetoes the joint resolution of Congress, the final rule will take effect unless both Houses override the veto with a two-thirds vote.

In addition to the repeal effort, the Arbitration Rule may also be challenged in court. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) § 1028 requires the findings of the Arbitration Rule to be consistent with the CFPB’s arbitration study, which many argue showed that arbitration is more effective than class action litigation for consumers in resolving disputes because (i) it is faster and less expensive; and (ii) the average recovery is much higher for consumers who prevail in arbitration than in class actions.

There is also some speculation that a member agency of the Financial Stability Oversight Council (the “FSOC”), such as the Comptroller of the Currency, could petition the FSOC to set aside the Arbitration Rule. Pursuant to the Dodd-Frank Act, the FSOC may set aside a CFPB final regulation, or any provision thereof, upon petition if it decides “that the regulation or provision would put the safety and soundness of the United States banking system or the stability of the financial system of the United States at risk.” In a July 10 letter to Director Cordray, Keith Noreika, Acting Comptroller of the Currency, expressed concern about the Arbitration Rule’s “potential impact on the institutions that make up the federal banking system and its customers” and its adverse effect on “reserves, capital, liquidity, and reputations of banks and thrifts[.]”

How should we proceed in light of this challenge?     

We would recommend that banks and others offering covered products and services move forward as if the Arbitration Rule is going into effect and prepare to comply. Determine which contracts are subject to the Arbitration Rule, review those contracts to determine if they contain pre-dispute arbitration agreements, and if so, evaluate the options for compliance within the Arbitration Rule. These options include removal of the arbitration provision or editing the provision to conform to the Arbitration Rule. We believe many financial institutions will simply remove arbitration from consumer contracts, since one of the major advantages of most arbitration agreements is the ability to avoid class action lawsuits.

When will the Arbitration Rule become effective?

If the challenge is unsuccessful, the Arbitration Rule will become effective on September 18, 2017 – 60 days after its July 19 publication date. The mandatory compliance deadline will follow on March 19, 2018 – 180 days from the effective date. The Arbitration Rule is not retroactive, meaning it applies only to agreements entered into on or after the mandatory compliance deadline.

Davenport, Evans, Hurwitz & Smith, LLP, located in Sioux Falls, South Dakota, is one of the State’s largest law firms. The firm’s attorneys provide business and litigation counsel to individuals and corporate clients in a variety of practice areas. For more information about Davenport Evans, visit