The Consumer Financial Protection Bureau (CFPB), still headed by Obama holdover Richard Cordray, has put forth a regulation that will create even more of these bad settlement deals. The CFPB’s anti-arbitration rule would ban binding clauses in credit contracts that require an impartial, third-party dispute resolution process and preclude class action lawsuits.
As with many other CFPB rules that wreaked havoc on community banks, credit unions, and consumers, the CFPB and its boosters justify this rule as going after big banks and financial firms. Note that the rule is strongly opposed by representatives of small banks and credit unions such as the Independent Community Bankers of America and the Credit Union National Association.
But now the rule’s supporters are grasping at the irrelevant Equifax data breach that’s in the news, trying to intimidate senators into letting the anti-arbitration rule go into effect.
The Equifax breach has made Americans justifiably angry, as more than 100 million Americans had their Social Security numbers and other personal data hacked. But there is no binding arbitration clause stopping Americans from suing Equifax, either individually or as a class, because individual consumers never signed a contract with Equifax, as they were not its customers. So the CFPB rule would not have been any help to consumers in this situation.
While Equifax did initially have an arbitration clause in its agreement to provide free credit monitoring for affected consumers, this never applied to the breach itself, and Equifax eventually offered an opt-out to the arbitration clause for the service as well. The more pertinent reform needed is to overhaul the Fair Credit Reporting Act that both blocks competition from Equifax and may shield it from some liability, as Competitive Enterprise Institute Vice President Jim Harper has pointed out.
Another bogus argument against binding arbitration is that it supposedly goes against the right to trial by jury guaranteed in the U.S. Constitution’s 7th Amendment. Some Washington media outlets breathlessly report that a whopping two conservative groups are backing the CFPB rule, while ignoring a coalition letter signed by 27 conservative and free-market groups urging Congress to overturn this rule that “will cost consumers billions of dollars and unleash over 6,000 class action lawsuits every year.” The letter adds that “there are also significant issues with the structure of the CFPB and its overall lack of accountability to elected officials.”
The bogus argument from a very small minority of groups on the Right hinges on the 7th Amendment’s right to a jury trial for lawsuits “where the value in controversy shall exceed twenty dollars.” But no consumer is required to enter into a financial contract or agreement that includes binding arbitration. Consumers voluntarily enter into those contracts, probably because they don’t view it as a downside. These agreements for binding arbitration no more violate the 7th Amendment than nondisclosure agreements violate the 1st Amendment’s right of free speech. Both are voluntarily entered into by consenting adults exercising their freedom of contract.
And if binding arbitration agreements were unconstitutional, then President George Washington’s will would have been in violation of the Constitution. Washington, who passed away in 1799, inserted an arbitration clause into his will that provided for disputes to be resolved by “three impartial and intelligent men,” whose decisions would be “as binding on the Parties as if it had been given in the Supreme Court of the United States.” (Self-promotional note: I am writing a book on Washington’s entrepreneurial endeavors that will be published by St. Martin’s Press next summer. Here is the pre-order page on Amazon.)
In reality, as Iain Murray and my comments to the CFPB and our colleague’s Ted Frank’s recent Wall Street Journal op-ed show, consumers typically fare much better in arbitration proceedings than in class action lawsuits. In a recent class action case against the maker of Duracell batteries, attorneys received 16 times what their consumer-clients did and, when confronted with this disparity, the attorneys argued that this ratio was better than in many other class action cases. They were saying in effect, “Our terrible settlement deal is still better than all the other terrible settlement deals out there, folks—show some gratitude!”
Hopefully, the Senate will take seriously such egregious class action abuses and stop the CFPB rule that would perpetuate them.