Financial institution class actions could spike with rule change

A Consumer Financial Protection Bureau rule issued last week that precludes class action waivers in arbitration agreements in many consumer financial services contracts is expected to lead to an increase in class action litigation.

However, experts say there are possible regulatory, congressional and legal hurdles the rule may have to overcome before it can take effect, expected to be in September.

In the meantime, however, experts advise companies to prepare for its possible implementation.

Many consumer financial products, including credit cards and bank accounts, have arbitration clauses in their contracts that now prevent consumers from joining to sue their bank or financial company for wrongdoing, said the bureau in its July 10 statement.

“By forcing consumers to give up or go it alone — usually over small amounts — companies can sidestep the court system, avoid big refunds, and continue harmful practices,” said the statement.

The new rule “will deter wrongdoing by restoring consumers’ right to join together to pursue justice and relief through group lawsuits,” the statement continued.

Opponents to the rule include the U.S. Chamber of Commerce, which in a statement last week described the bureau’s finalization of the rule as a “prime example of an agency gone rogue.”

Many experts say they expect the rule will lead to an increase in class action litigation if it is implemented.

“It’s pretty clear this will result, over time, in a pretty substantial increase in class action litigation against financial institutions,” said Kenneth M. Kliebard, a partner with Morgan, Lewis & Bockius L.L.P. in Chicago.

“Class action attorneys would love to see the return of the class action vehicle,” said David M. Bizar, a partner with Seyfarth Shaw L.L.P. in Boston, noting that the consumers themselves often ultimately receive only small settlements in these cases.

“It’s an anti-business rule,” he said. “It feels good, but it’s going to produce the exact opposite result the consumer advocates and the bureau are claiming they intend to achieve. It’s going to result in more class action litigation, with all that entails,” with little benefit to consumers.

And while some experts believe the rule will mainly impact large institutions, others say all financial institutions will be affected.

“The rule likely will have a significant impact on all financial institutions” and lead to increased litigation costs, said Quyen Truong, a partner at Stroock & Stroock & Lavan L.L.P. in Washington who is former assistant director and deputy attorney general at the bureau.

Hurdles to implementation

Roadblocks that may prevent its implementation include the Congressional Review Act, under which the rule could be lifted through a joint congressional resolution within 60 days.

Observers note however that the bureau’s politically knowledgeable director, Richard Cordray, may have deliberately issued the rule now, when Congress is distracted by health care litigation, among other issues.

“I think that the CFPB is gambling on the Congress being preoccupied with other priority mattes, which might make it difficult to use the Congressional Review Act to unspool the rule within the 60-day deadline for action,” said Ms. Truong.

“I don’t underestimate Director Cordray,” said Maria B. Earley, a partner with Reed Smith L.L.P. in Washington, who is a former enforcement attorney with the bureau. “He’s got a mission, and he’s going to fulfill it.”

Mr. Kliebard said also, “Part of the movement that swept the Republicans into power was a bit of anti-Wall Street sentiment,” and rescinding the rule might be viewed as pro-Wall Street, “rightly or wrongly, so it’s possible Republicans would be unwilling to alienate that part of their base.”

There has already been discussion among members of Congress on legislation that would prevent the rule’s implementation, experts say. It is also possible Congress will address the issue by amending the Dodd-Frank Wall Street Reform and Consumer Protection Act, which established the bureau, “but that seems a bit of a stretch, given the current gridlock on other issues in D.C.,” said Mr. Kliebard.

Legal challenges could focus on the methodology used by the bureau to develop the rule and assertions that the bureau has exceeded its legal authority, among other possible positions, say experts.

Liz Kramer, a partner with Stinson Leonard Street L.L.P. in Minneapolis, said the Trump administration has already successfully repealed a number of pro-arbitration rules.

The Trump administration may also demand Mr. Cordray’s resignation, which could lead to the rule’s derailment, experts say.

It is also possible Mr. Cordray will resign. In a statement issued Friday House Financial Services Chairman Jeb Hensarling, R-Texas, said Mr. Cordray has refused to say whether he would serve his full term, which expires in July.

“If Director Cordray wishes to issue midnight rules, to hire or adjust the status of CFPB employees, to obligate CFPB funds, or to accelerate agency investigations, he should first commit to serving his full term. If he will not do so, the honorable course of action would be to resign and leave such decisions to his successor,” the statement said.

However, even if a new director were to be appointed, “there would be a lot of challenges” facing him or her because the CFPB “did such a thorough job documenting why it believes the rule is necessary,” said John E. Lande, an attorney with Dickinson, Mackaman, Tyler & Hagen P.C. in Des Moines, Iowa.

Financial institutions should start now to address the rule and “understand what types of changes they may have to make to their contracts and operations, and really get a handle on it and not necessarily rely” on the rule going away, said Ms. Earley.

“The time frame to come into full compliance with this rule is fairly short, and I think it would be wise to take an inventory of steps they may need to take” to fully comply with the rule, she said.