The Consumer Financial Protection Bureau's plan to restrict the use of mandatory arbitration clauses is likely to be scuttled by Congress, the incoming Trump administration or an industry lawsuit.
While the future of the agency and its director are both up in the air, many are now focused on its efforts to finalize the arbitration plan, which the industry fiercely opposes.
There are multiple ways that GOP policymakers and the industry could target the rule, leaving many observers to conclude that at least one will work. For starters, President-elect Donald Trump could attempt to fire CFPB Director Richard Cordray, likely igniting a protracted legal fight that may ultimately kill the arbitration plan.
"A new CFPB director will be installed and one of the first decisions will be to rescind regulation banning mandatory arbitration clauses in consumer financial contracts," said Jason Johnston, a law professor at the University of Virginia School of Law.
A new director could indefinitely postpone the rule's effective date, effectively killing it, or it could be amended or rescinded entirely, though changing it after it's been finalized is more difficult.
"Since amending or rescinding a final rule would be subject to a notice and comment period, the best chance to flat-out stop it would involve a new director before the rule goes final," said Joe Rodriguez, a partner at Davis Wright Tremaine, a former CFPB regional counsel.
Others believe Congress could successfully intervene to stop a final rule from taking effect. Under the Congressional Review Act, lawmakers have 60 days to overrule any new federal regulations issued by government agencies.
"The Senate can disapprove of this on an up or down vote," said Eric Bolinder, of counsel at Cause of Action Institute. "If the rule is passed, it's going to be pretty easy if both houses of Congress pass a joint resolution of disapproval of the regulation and the president signs it."
There also is a chance that one of the many Republican bills intended to restructure the CFPB would do the trick by amending the Consumer Protection Act of 2010 to require that no deference be given to the interpretation of consumer financial law by the agency.
Finally, some argue that the industry's best line of attack is a lawsuit challenging the CFPB's 728-page study on arbitration. The study found that consumers rarely file lawsuits involving financial products or services in any forum but that they receive an average of $5,389 in arbitration compared with a meager $32.25 from class actions.
Bolinder said a lawsuit could allege that the plan is "arbitrary and capricious."
If enacted, the arbitration proposal would have a far-reaching impact. Arbitration clauses are embedded in millions of consumer contracts for credit cards, checking and deposit accounts, certain auto loans, money transfer services, prepaid cards, small-dollar or payday loans and installment loans.
Currently, a wide range of consumer finance firms have been shielded from billions in potential liability, especially over small-dollar disputes that might lead to class actions but are bound by mandatory arbitration. Filing an arbitration claim costs about $200, so any dispute for less than $200 likely does not get filed.
The average $200 fee "is a barrier to filing an arbitration claim," Johnston said.
He suggests that institutions take care of many small-dollar disputes because companies refund billions in consumer fees and charges every year. But there is no data repository to determine how many refunds stem from disputed charges. Lawmakers have lamented that banks could jack up fees, assuming most consumers will not dispute them.
Moreover, data on class action and arbitration awards has little transparency since the arbitration process is bound by confidentiality agreements.
The CFPB has said it expects to issue a rule by February, and it is possible the bureau could try to release the rule before Inauguration Day. But doing so might open it up to criticism that it's a rush job since the agency is required to address the large number of comments letters it received.
Even if the CFPB acts fast, however, the timeline for a rule to go into effect should give the industry some comfort. A final rule would not apply to arbitration agreements entered into within 180 days of its effective date.
That gives the industry plenty of time to sue or push for a congressional solution.
A provision that would grandfather current agreements also gives the industry time to adjust.
"If the rule does go into effect, you can rely on the grandfather clause for years," said James Kim, of counsel at Ballard Spahr and a former senior enforcement attorney at the CFPB.