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Senate Set to Vote to Block CFPB's Harmful Arbitration Rule

After months of speculation, the Senate will today vote to block the Consumer Financial Protection Bureau’s (CFPB) rule banning financial institutions from including arbitration clauses in their contracts with customers. The rule is nothing short of a disaster, and we urge the Senate to reject the rule to protect both consumers and financial institutions from a blatant giveaway to trial lawyers. To get an idea of just how destructive the rule is, following is what some of CEI’s experts have said in the past.

Harmful to Consumers

The CFPB claims that consumers will be better off pursuing class-action lawsuits rather than private arbitration. But the reality is just the opposite. As CEI’s Iain Murray and John Berlau have shown in public comments to the Bureau, consumers overwhelmingly fare better in arbitration—it is quicker, cheaper, more favorable to consumers, and results in larger awards than they would receive from class action settlements.

This is proven by the CFPB’s own data, which is heavily skewed to support the rule. In their study, the CFPB found that only 13 percent of class actions resulted in a recovery for members. In the average case, attorneys would receive more than $1 million while consumers received $32. Meanwhile, the average award for arbitration was over $5,000.

The numbers from the CFPB’s own study are stark. But it is likely that the difference is even worse than the CFPB claims. As Ted Frank, director of CEI's Center for Class Action Fairness, wrote for The Wall Street Journal, a recent class action case against the maker of Duracell batteries saw the plaintiffs’ attorneys receive more than 16 times as much as their clients. According to the lawyers themselves, this was a better outcome for consumers than is usually the case.

Punishing Financial Institutions

The CFPB estimates that businesses will have to spend more than $500 million on defending lawsuits and $1.7 billion on settlements as a result the rule’s onslaught of slow and costly class-action lawsuits. This will not only be an enormous burden on financial institutions, but on consumers as well, as lenders pass on to them the costs of the rule.

The CFPB claims that this will not raise the cost of credit for consumers. But Iain Murray, citing a study by another bank regulator, the Office of the Comptroller of the Currency, shows how the cost of credit for an average customer could rise by nearly 3.5 percent. There is every reason to believe that financial institutions will pass on the cost of defending frivolous lawsuits on to consumers, either by raising prices or cutting services.

Further, as John Berlau has noted, smaller institutions without large legal teams, such credit unions, community banks, and peer-to-peer lenders, will all be victims of the rule, too. He notes: “[P]eer-to-peer lending will slow and could grind to a halt, due to the prospect of an individual lender having to hire a lawyer if the person or entity to whom they lend has any type of grievance.”

The arbitration rule will result in more lawsuits for companies, leaving consumers with fewer choices and higher costs.

Giveaway to Trial Lawyers

The arbitration rule is a blatant reward to trial lawyers, who overwhelmingly benefit the most from more class-action lawsuits. CEI’s Center for Class Action Fairness, headed by Ted Frank, is devoted to combating the flagrant abuse of the judicial system for these wealthy lawyers benefit.

Class actions can act as a form of wealth transfer from consumers to wealthy attorneys. The CFPB’S own data proves this, predicting that the rule would transfer $330 million to trial lawyers over the next five years.

For Republicans, this should be especially concerning. Trial lawyers, unsurprisingly, are major donors to the Democratic Party.

Flawed Justification for Rulemaking

The CFPB’s study of mandatory arbitration clauses was wholly inadequate to justify a federal rulemaking. Not only did it outlandishly reject large amounts of academic research showing the effectiveness of arbitration, its own study proved that arbitration brings better outcomes for consumers than class action lawsuits.

Such negligence has not gone unnoticed. A report released this week by the Treasury Department harshly criticizes the CFPB’s analysis, finding the justification to be seriously deficient. As Iain Murray writes: “The Treasury criticisms make it clear that the CFPB has abused the rulemaking process to push out a rule that will not provide the benefits it claims.” Many of the issues highlighted in the Treasury report have been noted by CEI has argued in the past, including the flawed justification for rulemaking.

Today’s Senate vote to overturn the disastrous arbitration rule gives Republicans an opportunity to notch a win for financial institutions, businesses, and consumers, by protecting the financial system and its users from an unaccountable government agency.