CFPB's Arbitration Rule No Favor for Consumers

Once again the CFPB regulations make ordinary Americans worse off.

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Exterior of the Consumer Financial Protection Bureau, Washington, DC USA
Ted Eytan/Flickr

When it comes to identifying the worst government agency, it's hard to pick just one. It's equally hard not to immediately think of the Consumer Financial Protection Bureau. There's just something particularly off-putting about an agency that is so self-righteous in trumpeting its virtuous defense of consumers but nevertheless keeps finding ways to make them worse off.

Established in 2010 as part of Dodd-Frank, the CFPB didn't take long to become notorious. One of its first acts was to completely and lavishly renovate its own headquarters—which, in typical Washington fashion, succumbed to ever-rising cost estimates. It then began participating in Operation Choke Point, an Obama-era attempt to strong-arm banks into closing the accounts of legal businesses that happen to operate in markets—such as firearms and tobacco—disfavored by politicians.

The CFPB also has waged a relentless war against small-dollar lenders who service a poorer clientele than traditional lenders, all while saddling conventional banks with costly new regulations. It's little wonder then that since the CFPB was created, free checking accounts have been on the decline and credit for the poor has been harder to find.

The latest example of CFPB overreach comes in the form of a rule prohibiting financial services companies from including binding arbitration clauses in their contracts. This is a misguided decision for several reasons.

For starters, an internal study used by the CFPB to justify its rule was methodically flawed. My colleague Todd Zywicki and the University of Pennsylvania Law School's Jason Scott Johnston have shown that the CFPB report was aimed toward reaching a predetermined conclusion and contained no data on arbitration settlements, the most common outcome. If anything, the report proved that arbitration works for consumers because it offers, in Zywicki and Johnston's words, such "an inexpensive, fast, and efficient process."

What's more, the CFPB further waved away all the academic literature that establishes the effectiveness of arbitration and discounted its own data showing that arbitration more often compensates consumers faster—a and with larger awards—than class action suits.

Despite the fact that arbitration has a long, established history, the CFPB study insists that class action is preferable to arbitration. The evidence rests on the average $220 million awarded to 6.8 million consumers annually. However, the reality is that class action only produces token rewards for class members (an average of $32.38 per person, according to CFPB data), which stands in contrast to the huge fees collected by lawyers. As Zywicki and Johnston noted, "during the 2010-12 period examined in the study, class action attorneys raked in $424,495,451."

Let me repeat that: Millions of consumers get the same paltry amount as a few hundred lawyers. In other words, bureaucrats have decided that what matters most is for consumers to have "their day in court," even if it means waiting three times as long for a resolution and getting a smaller payout.

Such condescension is typical, as the CFPB is essentially premised on the idea that what is better for people is what bureaucrats say is better, as opposed to people's own revealed preferences. And as the Cause of Action Institute's Alfred J. Lechner Jr. (also a former U.S. District Court judge) adds, to promote its preferences, the CFPB is content to use junk science rather than sound research. How else can it justify banning a mechanism that many consumers willingly agree to even when other alternatives are readily available?

The CFPB is unique in American history in that its structure means that it lacks any semblance of political accountability. It features a single director—who can't be removed except for cause—has access to unlimited funds from the Federal Reserve and has free rein to make law as it sees fit. This problem must be addressed, but in the meantime, Congress could stand in the way of the CFPB's jabs at the American economy.

The House on Tuesday passed a resolution disapproving of the CFPB's invasive arbitration rule under the Congressional Review Act, which affords Congress the opportunity to overturn federal regulations within 60 legislative days. Let's hope the Senate doesn't now live up to its moniker as the place where good ideas go to die.

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  1. I have long realized that government’s core competency is violence, and that it is nowhere else competent. But the CFPB even surprised me at its venality and that it was intentionally designed to have no accountability. It will probably be declared unconstitutional sooner or later, because, IIRC, the President can’t fire the director, Congress has no oversight, courts are prohibited from judging it, and it raises its own funding from its own programs. It’s quite obviously designed to further statism and nothing else. Patronism at its most blatant.

    1. My guess is there not even that good at violence. They just have a monompoly basically no system wishes to deny them.

      1. Yeah. Breaking shit and ruining people’s lives is not all that hard.

  2. Aaaand duly logged. Excellent ammo for if I ever get in argument with a Chavismo Bro (TM). I assume I’m not the only one who comes to this site looking for rejoinders/comebacks/trivia to put in the rhetorical quiver.

    Leave it to Sacagawea to design a department to enforce accountability by completely shielding it from accountability. Definitely on my top 10 Least Favorite People list (somewhere between Sessions and Jong-Un).

  3. My previous experience at CFPB is that they care little for government rules and regulations. I have heard and been told that they are exempt from needing to adhere to federal mandates, because they are a “quasi-government” agency. The only time they will enforce regulations is it said regulation has been implemented by executive order.

    Additionally, the majority of CFPB personnel are 30 years old, or younger. I’m don’t want to play age discrimination politics, but read into that what you will. I have picked it apart and wished that CFPB had older staff members who would right the ship, if possible.

    My experience also identified issues with management. I won’t go into great detail, but decisions are not being made, which leads to staff members not have direction. There is also a problem with managers not identifying priorities for teams in the agency. This has led to different teams performing siloed work that isn’t communicated. In reality this isn’t always an issue, but it does become an issue when decisions are made by teams who do not have the authority/knowledge to make those decisions.. which has led to some work creeping into the “rouge” category.

    I won’t miss all the pains caused by lack of leadership at that place.

    1. I have it secondhand that every person in the Bureau spent the first several months of 2017 updating resumes in a blind panic – my boss had a good friend there who was convinced that her job was going to disappear any day. No idea what happened with that since.

      1. Another government agency that can have its full budget cut to zero.

        National savings from closing government agencies really adds up.

        1. Don’t you wish! Among the many features:
          1. The director can only be removed by the President “for cause”. Not the ‘serve at the pleasure of the President ‘ for the cabinet level guys. (Found to be unconstitutional in circuit court)
          2. Not subject to legislative budget review. Funded through the Federal Reserve.

  4. ” In other words, bureaucrats have decided that what matters most is for consumers to have ‘their day in court,’ even if it means waiting three times as long for a resolution and getting a smaller payout.”
    Technically, arbitration is NOT a ‘day in court’.

    Although it is clear that trial attorneys have pushed for class actions to remain a huge pay day for them and chump change for defendants, arbitration is not always the answer either.

    1. But voluntary contracts are always the answer.

      1. True. Most products do not have mandatory arbitration clause contracts active upon use.

        The CFPB is mostly about banking, so you would sign a contract with checking accounts and credit cards.

  5. Despite the fact that arbitration has a long, established history, the CFPB study insists that class action is preferable to arbitration. The evidence rests on the average $220 million awarded to 6.8 million consumers annually. However, the reality is that class action only produces token rewards for class members (an average of $32.38 per person, according to CFPB data), which stands in contrast to the huge fees collected by lawyers. As Zywicki and Johnston noted, “during the 2010-12 period examined in the study, class action attorneys raked in $424,495,451.”

    You ever notice how many of these shitty regulation like this one end up resulting in windfalls for the bureaucrat’s lawyer buddies? I’m sure it’s just a coincidence…

  6. Any consumer who has been through an arbitration administered by JAMS or AAA will know that it is a laughable experience in terms of justice. The commercial party pays for all but $200-$250 of the arbitration costs, which run tens of thousands. If a particular arbitrator sides with the consumer in a particular case, the commercial party (who pays 99% of the costs) will never agree to having that arbitrator again.

    The average award metric is not helpful because most consumers get screwed over.

    By the way, banks say they love arbitration (to kill off class actions) but if a consumer tries to compel arbitration over a debt collection case, the banks will oppose that motion every time.

    Arbitration provisions in consumer adhesion contracts is a scam. It is fine in negotiated contracts.

  7. RE: CFPB’s Arbitration Rule No Favor for Consumers

    That’s not the point.
    The point is we are all so lucky to have a needless, useless bureaucracy and an army of unneeded, overpaid and lazy bureaucrats micromanaging our meaningless lives.
    We should all get down on our knees and thank God we have such an agency wasting our tax dollars and time to further the advance of The State for the benefit of our ruling elitist turds suppressing us along with their wonderful and honest cronies.
    I weep with joy.

  8. Did you actually read the regulation? It states that a company may not *compel* a customer to submit to binding arbitration. There is nothing in the regulation that prevents a company from *offering* the service.

    It seems profoundly un-libertarian to support a system that allows a company to compel an individual to sign away access to the courts for redress of grievances (which is the OTHER half of the arbitration clause) – or have you just never actually read any of the contracts in question?

    1. Are you being “compelled” to sign the contract? And is the company being “compelled” to offer you that manner of contract alone?

      No? Then there is no compulsion, save that of the CFPB (and the legal idiocies that have allowed many of these banks to form de facto monopolies, which is the actual problem, for which all the CFPBs in the world are a mere band-aid).

    2. Exactly. I don’t understand why people here want everyone to be forced into arbitration. Obviously companies think they have a better chance of winning under arbitration – why help them out?

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