Congress Can Rescind the CFPB’s Gift to Trial Lawyers

Do Americans need more lawsuits? They’ll get them if the Consumer Financial Protection Bureau has its way. The CFPB—created by the Dodd-Frank Act of 2010 and still run by an Obama appointee—issued a rule in July barring financial institutions from including arbitration clauses in their contracts with customers. That means disputes would have to be settled by class-action lawsuits, which mostly benefit lawyers.

The agency justifies its rule by claiming it found that 79% of money paid in class-action settlements goes to consumers. The statistic is bogus. Lawyers publicize the handful of settlements in which cash actually goes to consumers but hide the overwhelming majority of settlement results from public view.

A Florida federal district court, for example, has in recent years approved several settlements with banks concerning mortgage-insurance practices. Lawyers collected tens of millions of dollars. But the claims process for mortgage-holder class members was so arduous that consumers were certain to receive only a fraction of that. Class members, who have no say over who is appointed as their attorney, objected repeatedly. The court refused to consider how much class members would actually receive in the settlements—or even require its disclosure.

How did the CFPB study treat settlements like these, in which there is no public information about how much the class received? It assumed every class member got paid, then calculated its ratio based on that fictional “gross relief” number. The agency also calculated a “net relief” ratio based on actual payments—but that ratio ignored all settlements in which the actual payments were not disclosed, as well as those in which the class received no cash at all and the attorneys got 100% of the proceeds.

My legal team at the Competitive Enterprise Institute got involved in a recent class-action settlement involving Duracell batteries. (The CFPB rule only applies to financial businesses, but the rules for what lawyers can take from class-action settlements are the same for batteries as for banks.) The plaintiffs attorneys in the Duracell case received more than 16 times as much as their clients. They countered that since the majority of class-action settlements fail to compensate more than 99.7% of the class, their 0.5% compensation rate was above average. We regularly litigate against settlements with even worse ratios than that.

Class-action attorneys fees often total thousands of dollars an hour. And even that number understates the windfall to lawyers because, as The Wall Street Journal reported in 2013, many cases involve $25-an-hour temps with law degrees doing menial tasks that are billed to class members at over $500 an hour.

The CFPB’s study also ignored the millions of dollars spent on lawyers to defend against lawsuits even when the defendants prevail—costs eventually passed to consumers.

Congress has a chance to undo this CFPB regulation, thanks to the Congressional Review Act of 1996. The law requires federal agencies to submit new rules to Congress, which then has 60 “session days” to disapprove such rules with a simple majority vote and presidential signature. The House voted in July to repeal the CFPB rule. The Senate can save consumers billions by following suit.

Trial lawyers are a major source of Democratic funding and can expect lockstep Democratic opposition to efforts to repeal the rule, as happened in the House. Senate Republicans need to unify and get the 50 votes required to perform the consumer-protection role the CFPB has abdicated.

Originally published to The Wall Street Journal.