A week ago, a lawsuit landed in the Northern District of Texas, Dallas Division where five national organizations and a coalition of associations located throughout Texas filed a legal challenge to the Consumer Financial Protection Bureau’s rule that prohibits the use of class action waivers in arbitration clauses.
Craig Nazzaro, who is of counsel in the Atlanta office of Nelson Mullins Riley & Scarborough, shared his assessment of the filing’s contents and assertions exclusively with SubPrime Auto Finance News.
“I strongly agree that the arbitration rule as currently drafted by the CFPB will immediately cause harm to lenders through increased legal and compliance costs and will ultimately affect the end consumer through higher costs of borrowing and tighter credit markets that will limit access to credit for certain borrowers,” Nazzaro said this week.
“The CFPB often has a difficult time appreciating the effects that its actions have on those whom they regulate,” he continued. “The bureau repeatedly focuses on immediate consumer risk, and here it believes that consumers’ untethered access to individual and class action litigation can and will mitigate any risk to the consumer.
“Where the CFPB often falls short is accounting for the long-term effect that its actions will have on that very same consumer,” Nazzaro went on to say. “The arbitration rule as written will increase regulatory and legal costs for lenders as they are forced to hire counsel to defend against increased litigation, which will move slower and with greater expense than matters in arbitration would.
“These costs will not just be absorbed by said lenders, they will be ‘priced in’ to the borrower’s cost of credit. This will result in higher borrowing costs for consumers who are already stretched thin,” he added.
Nazzaro then explained that plaintiffs — which includes the U.S. Chamber of Commerce, American Bankers Association, American Financial Services Association, Consumer Bankers Association and the Financial Services Roundtable — provide strong arguments against the CFPB’s authority to issue and enforce the rule. He noted that the industry has already seen how far PHH Corp. has gotten with the Article 2 argument in the D.C. Circuit of the U.S. Court of Appeals.
“It will be interesting to see how the Northern District of Texas comes down on the issue,” Nazzaro said. “The process and results of the CFPB’s arbitration study were attacked by the industry almost immediately when the CFPB announced its actions.
“As argued by the plaintiffs in this suit, I agree that regarding this particular study, the CFPB failed to meet the requirements under Dodd Frank before moving forward with any actions restricting the use of arbitration,” he continued.
“The results of the study were most recently called into question by the Office of the Comptroller of the Currency when on Sept. 20, it released its own study titled, 'Probable Cost to Consumers Resulting from the CFPB’s Final Rule on Arbitration Agreements,’ which questions the integrity of the CFPB’s study,” he went on to say.
Looking ahead, SubPrime Auto Finance News asked Nazzaro to estimate the timeline of future developments in connection with this matter.
“I do not think the issue will be resolved anytime soon,” Nazzaro replied “If the requested relief is granted, the CFPB will most likely attempt to appeal.
“If the relief is not granted and the plaintiffs choose to forego an appeal, I imagine this rule will be tested by countless others, given the only support for the rule seems to be coming from the CFPB itself and perhaps the trial lawyers who stand to benefit the most under the rule,” he added.
Nazzaro, who advises a variety of entities on all regulatory and compliance issues that impact the consumer lending industry including banks, non-bank lenders, servicers, investors, third party payment processors and debt collectors, closed his message by making one more point; this time touching on the unpredictable consequences when regulations and politics mingle.
“Given that the CFPB’s very structure allows the agency to operate in such a partisan manner, we will continue to see the bureau defend and push controversial initiatives such as the arbitration rule,” Nazzaro said.
“Equally upsetting is that the Republicans have now realized that they can capitalize on the structure and install a director who supports their political agenda,” he continued. “This approach would just repeat the same mistakes that the Democrats made in 2010 when pushing Dodd Frank through Congress.
“If we constantly are see-sawing between such partisan approaches to the supervision and regulation of consumer lending, then the only thing that will be guaranteed is a never-ending cycle of uncertainty as to how the rules will be enforced,” Nazzaro went on to say. “The only thing that is more expensive than overregulation is inconsistent regulation.”