Imagine you have a dispute with your credit card company. Currently, you can go to an arbitration body, where the card company will almost certainly pay all your expenses, and you may get compensated in full, usually promptly. Now, thanks to a new rule, courtesy of the inaptly named Consumer Financial Protection Bureau (CFPB), the regulatory agency unleashed by the Dodd-Frank Act of 2010, that won’t happen.
Instead, you’ll have to wait for trial lawyers to form a “class” that includes you, wait years while the lawyers do whatever it is they do, probably never see court, and then rejoice in a small refund, while the lawyers pocket millions. It’s what passes for “consumer protection” these days.
That’s the upshot of the CFPB’s new Arbitration Rule, which bans providers of unsecured personal credit from including mandatory arbitration clauses in their contracts. Bureau Director Richard Cordray portrays the rule as a consumer protection measure, but the only beneficiaries will be his wealthy trial lawyer friends.
If consumers need protection, it’s from the CFPB. Thankfully, the Senate can provide consumers — as well as investors and entrepreneurs — needed regulatory relief by passing the Financial CHOICE Act (FCA). Among its many good features, it would repeal the CFPB’s authority to prohibit arbitration.
Such a move would be welcome. Mandatory arbitration cuts costs for everyone. According to the CFPB’s own study, it produces better results for consumers than class action lawsuits. For class action attorneys, however, those consumer savings mean less in fees. Trial lawyers, the same CFPB study found, benefit to the tune of over $1 million in a typical class action, while the average class member receives only $32.
Naturally, lawyers have bridled at mandatory arbitration, which functions as a private, contractual form of dispute resolution, and have lobbied for it to be banned. With the Arbitration Rule, Cordray is poised to grant them their wish. The rule will transfer wealth transfer from low-income consumers to rich lawyers, delay the settlement of grievances, and reduce payouts. So much for consumer protection.
This CFPB move underscores the urgent need to curtail the agency and other abuses wrought by Dodd-Frank. For starters, Congress should repeal the rule by using a resolution of disapproval under the Congressional Review Act, which requires simple majorities in both chambers. The House and Senate have 60 days to vote down the CFPB arbitration rule, so they need to move fast.
Congress made a big mistake when it gave the CFPB so much power under Dodd-Frank — power enhanced by its unusual — and unconstitutional — structure. There are few checks on its power. It is not accountable to Congress’ “power of the purse,” because it gets its funding from the Federal Reserve. Nor is the Bureau subject to any meaningful oversight from the president as head of the Executive Branch. This led a federal Appeals Court last year to rule that the CFPB’s structure is unconstitutional (the ruling was set aside and the case is currently being reheard.
If that sounds like the Bureau can act as it wants, it does — as it did when it finalized its Arbitration Rule. We can expect CFPB regulators to promulgate more arbitrary rules in the future.
Fortunately, the Senate need not wait for the courts to rein in the unaccountable CFPB. It can build on disapproval of the rule by passing the Financial CHOICE Act. The FCA would restructure the Bureau by making its director subject to presidential oversight and its financing dependent on Congress.
The FCA would also address other problems foisted on the American economy by the Dodd-Frank Act. For example, it would provide a better solution to the “Too Big to Fail” problem, which Dodd-Frank has made worse. By designating them as “systemically significant financial institutions,” Dodd-Frank has made big banks more entrenched. It also has subjected non-bank financial institutions to inappropriate regulation that has raised the price of insurance.
The crushing burden of rules from the CFPB and other financial regulators has been a huge drag on the American economy since the financial crisis, contributed to the slow recovery, and hit Main Street banks hard. The rate of closure among small and community banks has doubled since the passage of Dodd-Frank. Around 1 million Americans have been forced out of the banking system by higher fees as banks have struggled to pay the costs of compliance.
Yes, the Senate has a lot on its plate right now, but this is an issue that’s fundamental to American prosperity. A freely functioning financial system is essential to faster economic growth — and the creation of more jobs and economic opportunity. Congress can start by disapproving the CFPB’s new rule, and the Senate can go further by passing the Financial CHOICE Act.
Originally posted to The Hill.