Before Congress left Washington, D.C., for the August recess, the Trump administration signaled its support for repeal of a recent Consumer Financial Protection Bureau (CFPB) rule that puts lawyers before consumers.
In a Statement of Administration Policy, the White House wrote that the CFPB’s arbitration “rule would benefit trial lawyers by increasing frivolous class-action lawsuits; harm consumers by denying them the full benefits and efficiencies of arbitration; and hurt financial institutions by increasing litigation expenses and compliance costs.”
Last week, Senator Elizabeth Warren, D-Mass., pushed back against the administration, knowing that repealing the rule would be a high priority in the fall session of Congress. In the hopes of countering White House warnings that financially vulnerable consumers bear a disproportionate share of this burden, Warren sent a letter of her own to sixteen banks demanding various information and data related to arbitration clauses.
Warren likely won’t be getting the data she’s looking for, not only because the banks aren’t obligated to provide it to her, but because the numbers she wishes to see don’t exist. The fact is, consumers fare better under forced arbitration. While the CFPB’s rule enabling consumers to file class action suits has the appearance of being consumer-friendly, it is nothing of the sort. It contradicts the CFPB’s own findings on the benefits of arbitration and ensures class action lawyers receive substantially greater compensation than those very consumers the bureau is supposed to protect.
Proponents of the CFPB rule argue that mandatory arbitration favors banks and credit card companies, asserting that consumers tend to forgo arbitration altogether and instead opt to cut their losses. However, a study conducted by the Bureau itself, and presented to Congress in 2015, contradicts this argument.
In fact, according to the CFPB study, consumers regularly pursue arbitration remedies for disputed charges, and they often employ legal counsel. The study also notes arbitration cases are typically completed quickly (i.e. within months), and the average award for consumers is just under $5,400.
If the CFPB was concerned that consumers are unaware of how arbitration clauses worked, the bureau could have proposed a rule requiring additional disclosure or more comprehensive consumer education. However, the agency instead sought to prohibit mandatory arbitration altogether and open a Pandora’s Box of class-action lawsuits.
In other words, the CFPB seems to have taken the position that there just aren’t enough consumers hiring lawyers.
Conversely, the CFPB study also shows that class-action litigation takes years, and in each case examined, the Bureau found that the complainant either withdrew the suit or settled, never going to trial. Of the $1.1 billion granted to in the cases, consumers only received an average of $32, often in the form of awards with no cash value, such as complimentary services like credit score reporting or credit monitoring. However, lawyer fees averaged $1 million per case, or about 41 percent of settlement awards, increasing in cases with fewer class participants.
While these litigators have a financial stake in seeing a class-action suit to completion, they have no real impetus to ensure that consumers get the best deal possible. The mission of the CFPB is to ensure that consumer financial products and services work for all Americans, not foster a system that encourages massive and expensive litigation at the expense of taxpayers and the individual consumer.
This rule will also create unintended consequences. Keith Noreika, the acting Comptroller of Currency and primary banking regulator for American banks, sent a letter on July 10 to the CFPB saying, “A variety of OCC [Office of the Comptroller of the Currency] staff have reviewed the CFPB’s arbitration proposal… and have expressed concerns about its potential impact on the institutions that make up the federal banking system and its customers.”
Charged with ensuring the safety and soundness of the United States banking system, the OCC is rightly concerned with how the CFPB’s rule will impact the banking system. Companies will limit the credit access to the least profitable segment of consumers – often those with the fewest financial resources. Banks will increase checking account fees, card interest rates, and minimum balance requirements, making it even harder for lower income Americans to afford basic banking services.
In its zeal to unleash litigation, the bureau charged with consumer protection has forgotten its own purpose. Both the direct and indirect consequences of this rule are clear, and the House has already voted to repeal and reject the rule. Despite Senator Warren’s attempt to run out the clock on the Congressional Review Act, when Congress returns from recess, the Senate must move quickly to repeal the rule and ensure consumers don’t ultimately pay the price for misguided CFPB actions.