Once again, the Consumer Financial Protection Bureau (CFPB) is putting forth a rule it presents as going after big banks, but will likely have its most devastating effects on small and startup financial institutions.
Much has been written about how the CFPB’s rule banning mandatory arbitration clauses will enrich trial lawyers and hurt ordinary consumers. My CEI colleagues Ted Frank, director of CEI’s Center for Class Action Fairness, and Iain Murray have shown how consumers typically fare better in arbitration than in class-action lawsuits.
Other victims of the rule are likely to be credit unions, community banks, and sharing-economy innovations such as peer-to-peer lending. In CEI’s comments to CFPB last fall on the regulation, I wrote that under the rule, “peer-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 result will be fewer choices and higher costs for consumers.”
In its final rule issued last month, the CFPB does reply to my point, acknowledging that the rule could deter innovation. But then it tries to swipe the criticisms away. “Even if at the margins, the effect of the class rule would be to deter certain innovations from occurring or to reduce the availability of certain products, the Bureau believes that, on balance, that would be a reasonable cost to achieve the benefits of the rule for the public and consumers,” states the CFPB on page 320 of the rule.
On peer-to-peer lending and whether ordinary Americans lending to their peers could be targeted in lawsuits if arbitration clauses were banned, the CFPB states it cannot not take “a position on the liability of such peer lenders.” It then implies, however, that these individuals are already unprotected by peer-to-peer arbitration clauses. “The pre-dispute arbitration agreements of online lending platforms, generally reference and protect only the platform, not the individual lenders,” the CFPB states matter-of-factly.
But a simple look at the arbitration clause of an online Lending Club borrower contract shows the CFPB is flat wrong. The online “borrower agreement” states that “any dispute” with “Lending Club or “any subsequent holder” [emphasis added] of the Loan Agreement and Promissory Note will be resolved by binding arbitration.”
To perhaps emphasize the point that the arbitration clause should apply to all parties involved, the contract states that “the scope of this Arbitration Provision is to be given the broadest possible interpretation that is enforceable.” So there is lots of language to protect individual peer lenders that will be wiped away by the CFPB’s rule banning these types of clauses.
Credit unions, which are also financial institutions that are far different from big banks, will also likely fall victim to the CFPB rule. The Credit Union National Association writes that the regulation “will limit options for resolving disputes and could increase the incidences of frivolous class action litigation against credit unions, which could cause members to suffer when costs rise and resources are depleted.”
The association adds that the rule goes against the principle of cooperative ownership by “encourage[ing] members, against their best interest, to engage in litigation against the institution of which they are a member-owner.”
Yet more reasons for the Senate to follow the House’s lead and pass a Congressional Review Act resolution to block the CFPB rule!