CFPB

Defenders of the CFPB's Newest Financial Regulation Are Ignoring Crucial Facts

Senate Republicans could vote as soon as this week to repeal the CFPB's ban on arbitration clauses.

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KEVIN DIETSCH/UPI/Newscom

In the wake of the Equifax breach, in which hackers stole names, social security numbers, and other personal information for more than 143 million people from the credit scoring agency's databases, Americans are rightfully more concerned about holding financial institutions accountable for misusing or losing valuable data.

Democrats have now tried to turn the Equifax breach to their political advantage, whipping up a dry-but-important battle over financial regulation into a populist squall.

Republicans want to repeal a new rule by the Consumer Financial Protection Agency banning arbitration clauses in contracts signed between consumers and financial services companies, including banks and credit card companies. The new CFPB rule requires disputes or settlements in banks fraud or other customer betrayal cases to be settled through class-action lawsuits rather than a third-party arbitrator. Despite mixed evidence, the CFPB says banning arbitration is good because it allows consumers "their day in court."

Republicans have turned to the Congressional Review Act to wipe the CFPB's arbitration rule off the books. The law is a now-familiar tool used to repeal about a dozen Obama-era regulations since President Donald Trump took office in January.

The House voted along party lines in July to pass a CRA resolution repealing the rule, and the Senate is set to vote on the same resolution perhaps as soon as this week. The White House has indicated its support for the move

"Forced arbitration is a tool that big corporations use to silence victims of corporate fraud or corporate abuse," Sen. Sherrod Brown, D-Ohio, said Tuesday during brief remarks on the Senate floor, invoking the Equifax breach. "Forcing these families to sign away their rights is not only wrong, it's dangerous." Similar rhetoric is blaring from television screens in some states, like Maine, where ads funded by Allied Progress Action, a progressive campaign organization, are targeting Republican senators seen a swing votes on the CRA resolution. "Big corporations like Equifax got caught trying to sneak it past you," the ads say, referring to the arbitration clauses sometimes included in financial services contracts.

Those ads—and the Democratic talking points about the arbitration rule—are flawed in several ways. "If there were a consumer bureau for political ads—not that there should be—this one would be facing some penalties for deception," says John Berlau, senior fellow at the Competitive Enterprise Institute, a free market think tank opposed to the arbitration rule.

It's not accurate to say that arbitration clauses eliminate anyone's rights. Only government can do that. These are private contracts between banks or credit card companies and their customers. If customers agree to waive their rights to a class-action lawsuit and accept arbitration instead, that's something they are free to do, Berlau says. By banning arbitration, it's the CFPB withholding choices from consumers.

The CFPB and its defenders say they are protecting consumers, a second flaw in its thinking. Studies show, often, if not always, wronged customers end up getting bigger payouts through arbitration than through the courts. After lawyers' fees, the average payout in class-action suits was only $32.38 per person, according to the CFPB's own data. Research by Todd Zywicki, a senior research fellow at the Mercatus Center at George Mason University, a free market think tank, and Jason Scott Johnston, a professor at the University of Virginia Law School*, found that arbitration is "an inexpensive, fast, and efficient process" compared to the time consuming process of class action lawsuits.

When CFPB Director Richard Courdray announced last year that the bureau was aiming to steer disputes away from arbitration and into the legal system, he said it was a fulfillment of a "core American principle," that all consumers should have their day in court. On the Senate floor Tuesday, Brown agreed, arguing that a Republican repeal would undermine that principle.

But given the choice between getting a day in court and getting a better settlement, most Americans would probably take the latter.

Framing the debate as a matter of big corporations versus powerless consumers misses a key part of the dynamic. Small banks and credit unions are opposed to the CFPB rule too. Camden R. Fine, president and CEO of the Independent Community Bankers of America, a trade association representing smaller banks, says arbitration has been a useful and cost-effective tool for both customers and community banks to settle customer disputes.

"It isn't economically feasible under the new rule for community banks to continue to pay the costs associated with arbitration for customers if banks are forced to carry the high legal costs associated with class-action lawsuits," he says. Those higher costs will be passed along to customers, most of whom will gain little or nothing from the CFPB's ban on arbitration.

The CFPB's arbitration ban doesn't help consumers and doesn't help banks, but it would be a major boon to trial lawyers. The arbitration ban is another proxy war in a long-running battle between business groups like the U.S. Chamber of Commerce and trial lawyers, as Politico's Lorraine Woellert reported last month.

There's a lot of money at stake. The CFPB study that supposedly justified the new rule shows that class action attorneys made more than $424 million in the three-year period examined in the study. Consumers during that time, if you'll remember, got settlements averaging $32 apiece.

CORRECTION: The original version of this article stated that Jason Scott Johnston was a professor at the University of Pennsylvania Law School. He left that position in 2010 and joined the University of Virginia School of Law the same year.

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  1. Who will stand up for high powered attorneys?

    1. BUCS-
      Oh, I think they’ll be able to find a completely unbiased advocate or two somehow.

  2. The CFPB should be wrapped in razor wire, shot in the head, and dumped in the Potomac to drift into the ocean never to be seen again.

  3. It’s not accurate to say that arbitration clauses eliminate anyone’s rights. Only government can do that. These are private contracts between banks or credit card companies and their customers.

    *Bangs head into wall.*

    Okay, I’ll just go down the street and get a credit card that does not have this clause. And I’ll definitely sit down and read all the pre-Obama fine print they used to do. We’re all perfect economic automatons and definitely never at the mercy of extremely powerful corporate interests, what with our perfect information gathering abilities even in the face of direct attempts to confuse and exploit us.

    Enjoyed the pity party for banks at the end too. Oh no, class action suits might be punitively costly! The horror of something working exactly as it’s supposed to.

    It’s not like major financial institutions have done anything wrong to the entire civilized world lately or anything.

    1. Enjoyed the pity party for banks at the end too. Oh no, class action suits might be punitively costly! The horror of something working exactly as it’s supposed to.

      So it’s supposed to kill small banks and credit unions to the benefit of the largest corporations? Exactly as it’s supposed to! Accidental honesty or just a sign of brain damage? Let the debate begin.

      1. “Small” is Washington speak for “the biggest.”

        But since we’re so concerned with the consequences of people exercising their right to sue, why not just take the right away altogether? We’re libertarians, we worry ourselves about the consequences of too much freedom all the time, after all.


        1. We’re libertarians…

          *flicks the ‘laugh track’ switch on*

    2. Clearly, the freedom to contract applies unless you really *really* want something that someone else has.

  4. I’m impressed that someone, or something, was able to steal virtually half of all American social security numbers all at once. Seriously. I mean, it sucks and all but good job. We’re all quite impressed.

    Boy, good thing we were promised that our Social Security numbers would never be used for tracking American citizens huh. That turned out well!

  5. This is an area where I have mixed feelings. On the one hand, going through the courts is (a) slow, and (b) expensive, while arbitration can get the problem settled more quickly. On the other hand, one has to be suspicious of any system for resolving disputes in which only one party gets to choose the arbitrator (or, in the case of most arbitration clauses, the pool from which arbitrators are drawn).

    The only way to know if arbitration is fair is to compare it with the lawsuit process. I would suggest that a small percentage of arbitration cases be transferred to the courts(*). As long as the results in arbitration are not materially worse for the consumer than court cases, fine. But if it turns out that arbitrators favor the provider over the consumer (as compared with court cases), then the arbitrators involved are banned from handling cases involving that provider.

    That should keep the arbitrators honest while preserving the benefits of arbitration (speed, cost) for 99% or more of disputes.

    (*) Cases in which both parties prefer arbitration _after the dispute arises_ would be exempt.

    1. I forgot to mention that there’s a logical fallacy at the end of this article:

      “There’s a lot of money at stake. The CFPB study that supposedly justified the new rule shows that class action attorneys made more than $424 million in the three-year period examined in the study. Consumers during that time, if you’ll remember, got settlements averaging $32 apiece.”

      To get a valid comparison, you have to ask, how much did the attorneys make _per consumer_. If the average lawsuit result is $32 per consumer but the attorneys got $5 per consumer, is it really that bad a deal for the consumers?

      The only way to know is to compare apples to apples and oranges to oranges. Comparing the _average_ per consumer with the _total_ for the attorneys is simply dead wrong.

  6. Boehm’s column contains a logical fallacy at the end:
    “There’s a lot of money at stake. The CFPB study that supposedly justified the new rule shows that class action attorneys made more than $424 million in the three-year period examined in the study. Consumers during that time, if you’ll remember, got settlements averaging $32 apiece.”

    You’re not comparing the same units. You should either compare the total amount received by attornies with the total amount that consumers got, or compare the average amount the consumer’s got with (amount received by attornies) divided by (number of consumers). In other words: how much did each consumer “pay” the attornies who represented them in class actions.

  7. I’m impressed that someone, or something, was able to steal virtually half of all American social security numbers all at once. Seriously. I mean, it sucks and all but good job. We’re all quite impressed.

    Yoga Burn

  8. What an apallingly phony framing of the topic. We’re not talking about banks and customers agreeing to opt for an arbitration agreement. We’re talking about banks making it completely mandatory, with no ability to decline or opt out.

    We’re also talking about the forced “agreement” dictating that the bank, solely, gets input as to who the “objective” arbitrator is.

    The framing of the fees collected for representing vs individual average payout is also misleading. Is the point of most class action suits to enrich each aggrieved customer, or is it to halt widespread abuses with enough sting to discourage future abuses?

    If I get $30, but Wells Fargo takes a massive and painful hit for illegally signing me up for accounts to try and charge fees I never agree to, then I’m happy with $30. Is it in the fine print that bank employees who fraudulently open accounts for me can also bind me to arbitration as part of that process?

    This is horrible for a site that claims to be about “Reason.”

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