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Congress Voted to Invalidate Rule Banning Arbitration Agreements with Class Waivers in Financial Services Contracts

Yesterday the Senate voted (with Vice President Pence breaking the tie) to invalidate the Consumer Financial Protection Bureau's ("CFPB") rule that would have forbid arbitration agreements in consumer financial contracts from including class action waivers. It is all but a foregone conclusion that the invalidation will garner the President's signature. Once a Presidential signature is obtained, the rule will not take effect and the CFPB cannot re-issue a rule that is substantially the same unless authorized by Congress.

In July of this year, the CFPB issued a final rule that would have essentially banned the use of arbitration agreements that waive class actions in consumer financial services contracts. While the CFPB first proposed this rule back in May 2016, the final rule was a blanket ban on the use of arbitration by companies in the consumer financial services arena - whose products and services include various credit related activities such as credit cards, automobile leases, deposit accounts, check cashing, extensions of credit, student loans, etc.  The practical impact, if the rule would have come into effect, would be to overturn AT&T Mobility LLC v. Concepcion where the US Supreme Court found these same arbitration agreements enforceable. This Supreme Court decision overturned a previous California Supreme Court decision holding that class waivers in consumer arbitration agreements are unconscionable if the agreement is in an adhesion contract. Consumer advocate groups threw their support behind the rule because it offered protection to consumers whose claims were potentially small individually and the contracted entered into were from an inferior bargaining position.

There was speculation when initially issued that the rule would soon come under some form of scrutiny - whether by the legislature or in federals courts. It was slated to have drawn fire and review under the Dodd-Frank Act where the regulation must be "in the public interest and for the protection of consumers." Moreover, the CFPB is currently under a Constitutional challenge to its structure. A finding that the CFPB structure is unconstitutional would effectively invalidate the rule as well.

Additional concerns and skepticism were immediately expressed by members of Congress. As many expected, and it so happened, Congress under the Congressional Review Act, overturned the rule by a simple majority under their fast-track procedures.

What we are left with is legislative and judicial deference to arbitration provisions in consumer contracts that favor corporations rather than individual consumers. Consumer arbitration remains the "wild west" - largely unregulated.