Crowdfunding Insider reports on CEI's comments on the Consumer Financial Bureau's proposed ban on arbitration regarding certain consumer financial agreements.
While the intent may be to benefit consumers, the Competitive Enterprise Institute (CEI) has challenged the assertion.
The CFPB bases much of its argument to remove binding arbitration from a study commission from 2015. The 728-page document asserts that consumers would be better protected if cases of malfeasance were allowed to follow the legal process – such as a class action lawsuit. The CFPB research was mandated under Dodd-Frank to “study the use of pre-dispute arbitration agreements in connection with the offering or providing of consumer financial products or services.”
CEI explains that it is very supportive of access to justice and consumer protection but argues against the belief that “arbitration clauses in credit agreements as “gotcha” clauses, implying that they deny consumers access to justice.” CEI states – this is far from the truth.
The problem surrounds the class action process. All too frequently the big winner in lawsuits against large corporations are the attorneys. The consumer or plaintiff comes away with little in a successful prosecution. “The attorneys purportedly representing them [class actions] walk away with the bulk of a multi-million dollar settlement.”
Broken Benjamin MoneyCEI points to data indicating that 80% of class actions filed never make it to court. Of those that do, the average class action takes more than three years to move to settlement for the consumer. Of course, then there is the appeals process which may take years too. CEI cites an American Bar Association survey found that 75% of the attorneys in its litigation section believe the outcomes of arbitration are equal to or better than those of litigation.
CEI’s strong opposition to the CFPB proposal also includes a warning for alternative finance. CEI states;
“…the proposed rule would have a devastating effect on new “sharing economy” financial innovations (known as “FinTech”) such as online peer-to-peer lending. As the growth of the peer-to-peer lending industry shows, many ordinary Americans are eager to lend to other consumers, often at more favorable rates than those offered by a traditional lender, and sometimes without any interest charges. Under the proposed CFPB 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.”
John Berlau and Iain Murray, the authors of the CEI comments regarding the arbitration proposal, said a rule change as outlined would harm ordinary Americans while helping wealthy lawyers.
“The CFPB arbitration rule would take away the rights of consumers and financial professionals to resolve disputes by binding arbitration instead of the often-cumbersome and ineffective process of class action lawsuits,” said Murray.
Berlau added that the CFPB is putting Fintech innovations at risk. Hiring an attorney to resolve any dispute will add cost to new financial firms that may provide consumers with superior services.
“Instead of a ban on arbitration, the CFPB could take other steps to help consumers, such as making the terms of arbitration clauses opt-out,” he explained.
Read the full article at Crowdfunding Insider.