The embattled Consumer Financial Protection Bureau has concocted a new scheme to benefit special interests under the guise of protecting consumers. Relying on deeply flawed research, the agency recently finalized a rule to ban all use of binding arbitration clauses by financial services companies. The result will be a boon to trial lawyers but provide no real benefit to consumers.
The new rule applies to consumer financial products such as credit cards or bank accounts, which sometimes include mandatory arbitration clauses for the handling of disputes. The CFPB argues that prohibiting these clauses benefits consumers, but their own report says otherwise.
One of the facts revealed when CFPB studied the issue is that class-action lawsuits rarely provide consumers with any substantive relief, even when they “win.” We hear of settlements with high-dollar figures on the news, but once the lawyers take out tens of millions in fees and the rest is split among large classes, they turn into a pittance.
The average settlement from class-action lawsuits, according to the CFPB report, is just $32 per person, while lawyers typically receive millions per case.
Yet the idea that class-action lawsuits are somehow preferable to the less costly, faster arbitration process that provides consumers higher average payouts is the basis of CFPB’s action. It’s the one they publicly state, anyway, but the only justification that makes any sense is that they are providing a handout to politically connected trial lawyers.
The Office of the Comptroller of the Currency asked CFPB to delay the rule while his bureau reviews whether it would compromise the soundness of banks. Unfortunately, CFPB has refused to provide the underlying data, likely because its initial study was widely criticized for being methodically flawed.
The CFPB is certainly no stranger to controversy. The agency’s very existence is controversial given its unusual autonomy and lack of political accountability. In challenging the agency’s constitutionality, a U.S. Court of Appeals warned that “when measured in terms of unilateral power, the Director of the CFPB is the single most powerful official in the entire U.S. Government, other than the President. Indeed, within his jurisdiction, the Director of the CFPB can be considered even more powerful than the President.”
That’s too much power for one regulator to hold. While the decision from the three-judge panel that held CFPB’s structure unconstitutional was set aside in order for the full panel of 11 judges on the D.C. Circuit Court of Appeals to hear the case, a move reflecting the issue’s importance, Congress has and should exercise its own power to restrict CFPB’s overreach by invoking the Congressional Review Act to overturn the arbitration ban. The House did its part this week in passing a resolution to disapprove of the CFPB rule, and now the Senate should follow suit.
The evidence shows that arbitration offers a faster and less burdensome process for consumers seeking compensation compared to class actions. It also generally provides more satisfactory relief. There’s simply no good reason for the CFPB to prohibit the market from deciding — through competition and consumer choice — whether or not arbitration has value. And no, providing hundreds of millions in new fees for their trial lawyer buddies is not a good reason.
