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Resolution of Disapproval of CFPB's Arbitration Rule Is Long Overdue

This week, the House of Representatives is scheduled to consider a joint resolution of disapproval (H.J. Res. 111) of a controversial new regulation issued by the Consumer Financial Protection Bureau (CFPB). The arbitration rule, which would ban the use of mandatory arbitration clauses in consumer financial contracts, should be stopped through this use of the Congressional Review Act (CRA). As CEI experts have argued, the arbitration rule is a harmful obstruction of justice that serves the interests of trial lawyers at the expense of consumers.

“This regressive attack on freedom of contract transfers wealth from consumers to wealthy attorneys," said Ted Frank, director of CEI's Center for Class Action Fairness. 

“The CFPB has disregarded vast data showing that arbitration more often compensates consumers for damages faster and grants them larger awards than do class action lawsuits. This regulation could have particularly harmful effects on FinTech innovations, such as peer-to-peer lending,” said John Berlau, CEI senior fellow.

Yet the CFPB’s arbitration rule is but one example in a long train of abuses by the CFPB. As CEI commentators have pointed out, while the agency is supposed protect consumers, the Bureau has put ideological distaste of certain products and services above consumer interests. The Bureau has often used its enormous, unchecked power to make access to financial services harder for middle class consumers and investors.

Harmful to Middle Class Consumers

CEI Vice President for Strategy Iain Murray noted five of these regulatory burdens in Five Ways CFPB Regulations Harm the Middle Class:

  1. Qualified mortgage (QM) rules. The rule makes it incredibly easy to sue banks for overestimating a borrower’s “ability to pay,” an inherently subjective standard. This has imposed huge new costs and liabilities on many small banks and credit unions, many of which have simply stopped issuing new mortgages. As a result, responsible middle income borrowers suffer from a regulatory induced lack of available mortgages.
  2. Payday lending regulations. Many of the CFPB’s regulations have made access to conventional financial services increasingly difficult. This has had particularly egregious effects on the most vulnerable, with 20 percent of American households “unbanked.” Yet the CFPB has gone further, by making low-dollar short-term loans very difficult to get. The CFPB has looked to kill off these industries on the specious argument that they harm their consumers, even when academic research into the effects of payday loans suggests that there have no harmful effects, and are possibly beneficial.
  3. Prepaid debt card rule. The 1,700-page rule subjects prepaid cards, which are most likely to be used by the most economically vulnerable, to more stringent rules than checking accounts. The rule will pile up costs on financial firms, reducing the amount and scope of the products they have available. As a result, millions of Americans will find their access to financial services further constrained.
  4. Violating consumer privacy. It has been reported that the CFPB gathers data on 22 million mortgages, 5.5 million student loans, 2 million bank accounts with overdraft fees, and hundreds of thousands of auto sales, credit scores, and deposit advance loans every month. This has drawn criticism from the Government Accountability Office for potential security risks and for failing to adequately protect consumer financial data.
  5. And of course, the arbitration rule.

Lack of Accountability

Part of the reason for the CFPB inflicting so much harm is its lack of accountability. When the Bureau has lacked justification to regulate, it has found a way. Many of the agency’s rulemakings are based on internal studies of dubious methodology and conflicting conclusions that ignore the academic literature. The recent rule banning arbitration agreements, for example, was based on a CFPB study that concluded  arbitration was more beneficial than class-action lawsuits. Yet the Bureau issued the rule anyway.

A lack of jurisdiction hasn’t held back the agency. Under the Dodd-Frank Act, the CFPB was specifically excluded from overseeing auto dealer loans. Despite this, the Bureau sought to regulate the finance firms that worked with the auto dealers for alleged breach of fair lending laws. The agency determined that racial minorities were routinely charged higher interest rates than whites and ordered the finance companies to pay remuneration. Since auto lenders do not collect ethnicity data, the CFPB used surnames and home zip codes to guess the likely ethnicity of the borrower. This almost comical methodology resulted in white people getting refund checks because of statistically determined discrimination against them as African Americans.

The CFPB has shown a commitment to impose rule after rule, hurting consumers, entrepreneurs and the financial services industry. The result has been the decimation of small and medium-sized banks and a drying up of loans from them to individuals and businesses in small town America. This alone should be cause for abolishing the agency.

Unconstitutional

Notwithstanding the economic burden, the constitutionality of the agency is also up for question. As Iain Murray has further explained:

Congress made a big mistake when it gave the CFPB so much power under Dodd-Frank—power enhanced by its unusual—and unconstitutional—structure. There are few checks on its power. It is not accountable to Congress’ “power of the purse,” because it gets its funding from the Federal Reserve. Nor is the Bureau subject to any meaningful oversight from the president as head of the Executive Branch. This led a federal Appeals Court last year to rule that the CFPB’s structure is unconstitutional (the ruling was set aside and the case is currently being reheard).

This unprecedented and unaccountable structure led CEI to bring a constitutional challenge to the CFPB. The lawsuit argues that the structure of the CFPB violates the Constitution’s separation of powers because the agency is insulated against meaningful checks by the legislative, executive, and judicial branches of government. CEI General Counsel Sam Kazman further explains the goals of the lawsuit in The Case against the Consumer Financial Protection Bureau: FAQ

If CEI’s lawsuit succeeds, the CFPB will be made more accountable to the people and businesses affected by the bureau’s regulations. The CFPB will no longer be able to ignore due process based on its own whims or prejudices, harming businesses that serve consumers’ genuine needs. A CEI win will remove the ever-present threat of arbitrary CFPB action and its chilling effect, and as a result, industries will be free to invest in financial innovations that benefit the American people.

The CFPB has continually acted with contempt for the American consumer, entrepreneur, financial services industry, and even the Constitution. While the recent arbitration rule has received particular attention for its excessive overreach, it is but one example in a long history of abuses. Congress is right to invoke the Congressional Review Act to protect American consumers, investors, and financial services from an agency gone rogue.