Can the CFPB Really Prohibit Pre-Dispute Arbitration Agreements?

Section 1028 of the Dodd-Frank Act, entitled “Authority to Restrict Mandatory Pre-Dispute Arbitration,” gives the CFPB the authority to promulgate regulations imposing conditions, limitations, or outright prohibitions on mandatory pre-dispute arbitration agreements relating to “consumer financial products or services. However, can Congress truly give the CFPB this authority?

Under Section 1028(a), the CFPB must first “conduct a study of, and shall provide a report to Congress concerning, the use of agreements providing for arbitration of any future dispute between covered persons and consumers in connection with the offering or providing of consumer financial products or services.”

However, following the study—and without any need to wait for a response from the report to Congress—Section 1028(b) allows the CFPB to, if it so chooses, prohibit pre-dispute arbitration agreements in the consumer finance arena.

There does not appear to be any concern under the U.S. Constitution’s Contracts Clause, because Section 1028(d) limits the reach of any such regulation to any agreement “entered into after the end of the 180-day period beginning on the effective date of the regulation.” However, there may be a conflict of a different sort, one concerning the Federal Arbitration Act (FAA).

Under the FAA, pre-dispute arbitration agreements involving interstate commerce—including those in the consumer finance context—are currently valid and enforceable as any other contract, and the FAA acts to override any state law to the contrary. Accordingly, should the CFPB independently decide to adopt regulations limiting or prohibiting the use of pre-dispute arbitration agreements relating to consumer finance, that regulation could be seen as an amendment or partial repeal of the FAA. Those defending such a regulation would argue that by enacting Section 1028, Congress delegated the power to amend or repeal the FAA in this way.

However, a serious challenge could be raised to such a regulation: While Congress can delegate authority to an administrative agency to adopt rules fleshing out the details of some existing statute (in a manner consistent with that statute), Congress does not have the constitutional authority to empower an agency to repeal existing law at that agency’s discretion. A challenger could argue that authority to repeal existing law is constitutionally vested solely in Congress and cannot be delegated in this manner. The answer to this question may determine whether those in the financial services industry may continue to utilize arbitration provisions in their consumer products.

Resources:

Dodd-Frank Wall Street Reform and Consumer Protection Act

Section 1028 – Authority to Restrict Mandatory Pre-Dispute Arbitration