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.
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.