The Department of the Treasury has released its analysis of the Consumer Financial Protection Bureau’s (CFPB) Arbitration Rule, which bans the use of mandatory arbitration clauses in financial contracts. The Treasury finds the justification for the rule to be seriously deficient. This makes it the second financial agency to slam the Bureau for abusing the rulemaking process in the last month.
The Office of the Comptroller of the Currency (OCC) also criticized the CFPB for playing statistical games in its efforts to justify the rule, in saying that evidence of an 88 percent probability that consumer costs would rise was not enough to suggest probable consumer harm (I commented on the OCC’s critique here).
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.
The Treasury criticisms echo many of the criticisms made by CEI when we submitted our comments on the rule—comments that were ignored or hand-waved away by the Bureau when it released the final rule. Here is a brief summary of the Treasury’s and CEI’s similar comments:
Treasury: The vast majority of consumer class actions deliver zero relief to the putative members of the class.
CEI: Eighty percent of class actions filed are never certified by the courts, either because they are withdrawn or because lawyers cannot meet the burden of proof showing common injuries to multiple plaintiffs. … In many class actions, over 90 percent of class members are not compensated at all.
Treasury: In the fraction of class actions that generate class-wide relief, few affected consumers demonstrate interest in recovery.
CEI: Plaintiffs’ lawyers’ own data produced in the Poertner v. Gillette litigation asserts that claims rates are “almost always” less than 1 percent in cases when class notice is given by publication.
Treasury: The Rule will effect a large wealth transfer to plaintiff’s attorneys.
CEI: [C]lass actions can act as a form of wealth transfer from consumers to wealthy attorneys
Treasury: The Bureau failed reasonably to consider whether improved disclosures regarding arbitration would serve consumer interests better than its regulatory ban.
CEI: The concern the rule purports to address, that consumers could be forced into arbitration without any benefit from the clause, is unfounded. However, if a regulatory approach is necessary, this concern can be addressed better by a requirement to offer consumers the right to opt out of class actions.
Treasury: The Bureau did not adequately assess the share of class actions that are without merit.
CEI: Eighty percent of class actions filed are never certified by the courts, either because they are withdrawn or because lawyers cannot meet the burden of proof showing common injuries to multiple plaintiffs.
Treasury: The Bureau offered no foundation for its assumption that the rule will improve compliance with federal consumer finance laws.
CEI: The CFPB rule justifies all of this by claiming the rule will act as a deterrent against companies exploiting poorer consumers. However, there is no indication that the incentive structures of the rule will achieve this
Treasury conclusion: An agency implementing such a drastic shift in policy should typically subject its rulemaking to the rigors of cost-benefit analysis and require incremental efficiency justification for more stringent regulations. The Bureau’s analysis fell short of these standards for agency rulemaking, as well as its own statutory command to determine that the Rule serves the public and consumer interests.
CEI conclusion: [T]he Bureau has not done an acceptable analysis of benefits and costs of its proposal.
The Senate may be on the verge of voting on whether or not to disapprove the rule. A vote in favor of disapproval would not just be a win for consumers but also a rebuke to the CFPB for its abuse of the rulemaking process.