The Consumer Financial Protection Bureau announced on Monday that it was finalizing its rule banning the use of mandatory arbitration clauses in financial contracts. The draft rule received over 110,000 comments, many of them critical (among them were CEI’s comments on the rule). Virtually all of the critiques were rejected out of hand, and the final rule is substantively the same as the draft rule.
Many of the comments, including some of CEI’s, focused on the methodology of the internal study on which the CFPB based the rule. This study rejected large amounts of academic research into and data on the effectiveness of arbitration and purported to establish that arbitration was used to restrict the use of class action lawsuits. The study concluded that banning arbitration would protect consumers and be in the public interest.
The study was flawed. As CEI noted:
The CFPB study is flawed owing to the incomparability of the data it attempts to compare. Attorneys routinely challenge arbitration provisions to protect their own special interests. As a result, consumers often have been thwarted in their efforts to exercise their right to submit to arbitration.
The CFPB arbitration study also completely overlooks resolution of customer complaints that do not result in legal disputes. Resolving a consumer’s valid complaint is much less expensive than either arbitration or litigation. Businesses resolve customer disputes every day without resorting to arbitration. The CFPB does not even measure such resolutions. All the CFPB acknowledges are the revealed preferences of defendants to arbitrate far more challenging consumer claims. Meanwhile, the Bureau characterizes class actions that result in a fraction of a percentage being paid to the class (often pennies on the dollar, as in the Checking Overdraft cases) while the attorneys are awarded millions as a “victory” for consumers. Enriching well-heeled attorneys does nothing to make consumers whole.
Moreover, the CFPB’s own data showed that arbitration resulted in more money, quicker, for the consumer than class action. (Other criticisms of the study can be found in this Mercatus Center paper).
In over 700 pages outlining the reasoning for the rule, the CFPB rule flatly rejects these critiques, often implicitly conceding that the study had methodological limitations without conceding that this might be a reason not to reach the conclusion drawn from the limited data.
Moreover, CEI and others contended that the rule was not in the public interest as consumers gain benefits from arbitration and class actions disproportionately benefit rich lawyers. Again, the CFPB waved these arguments away, saying that proven benefits from arbitration did not outweigh the right to gain a token benefit from class action, and that lawyers performed a vital public service. Indeed, the Bureau seems to argue that firms having to lawyer up is a feature rather than a bug of the rule.
In other words, the Bureau’s notice-and-comment period seems to have been simply an excuse to rubber stamp already arrived at conclusions.
The final rule has already been condemned by the U.S. Chamber of Commerce, which called the rule a “prime example of an agency gone rogue,” the American Bankers Association, the Consumer Bankers Association, and the Credit Union National Administration, which noted:
There is no evidence of consumer abuse by credit unions and as financial institutions that are member-owned… credit unions have a long history of working with their members to resolve disputes….The additional regulatory burden imposed on credit unions in response to abuses by other financial services providers further rigs the regulatory scheme in favor [of] Wall Street banks and other abusers of consumers and does credit union members an incredible disservice.
House Financial Services Chairman Jeb Hensarling, who last week threatened to find the CFPB Director in contempt of Congress as a result of failing to disclose information requested by his committee on the issue over a year ago, has called for the rule to be disallowed under the Congressional Review Act (CRA). Sen. Tom Cotton (R-AR) has already started work on such a resolution, saying the rule “ignores the consumer benefits of arbitration and treats Arkansans like helpless children, incapable of making business decisions in their own best interests.”
CEI will continue to work to overturn the rule and restore the ability of consumers to enter into arbitration agreements, saving them time and money to resolve disputes without benefiting trial lawyers.