The Consumer Financial Protection Bureau is moving forward with its costly arbitration rule, which would limit the use of class-action waivers in various consumer agreements.
What does that mean? First announced in 2016, the new mandate effectively punishes banks and financial institutions by making them more susceptible to class action lawsuits, which often carry millions of dollars in costs. The proposed rule would bar these financial institutions from using arbitration agreements that prevent consumers from filing or joining class action lawsuits in court in certain situations. The proposal encompasses credit card companies, traditional banks, and different types of lenders, which are disproportionately prone to costly class actions. It could open the door to widespread class-action litigation risk for almost all consumer finance companies that currently utilize arbitration language in contracts with customers, leaving these companies vulnerable to significant legal fees and damages—justified or not. In some cases, companies can face months of legal battles even if they’re not at fault for anything.
In the CFPB’s own words, “hundreds of millions of dollars” are at stake. While the agency paints financial institutions as villains out to steal consumers’ money, the reality is far more nuanced. When customers enter into arbitration contracts, they simply agree to take certain kinds of disputes to arbitration rather than litigating them in court. This does not apply to all disputes, as liberal activists often claim. And there are already limitations on corporate power in place. For example, arbitration arguments can be thrown out if the arbitration authority is found to be biased against one side of a dispute.
Moreover, arbitration is historically better at compensating victims faster and with larger awards than class-action lawsuits. As the American Financial Services Association’s Bill Himpler puts it, “The winner in class-action litigation is almost always the plaintiff’s attorneys, who pocket millions of dollars and leave the consumer with little to no financial compensation.” Plaintiffs in cases like the ones this arbitration rule would spawn often end up getting a few dollars for their trouble.
It’s curious that Richard Cordray, the CFPB’s current director and likely Democratic gubernatorial candidate in Ohio next year, would give class-action trial lawyers a regulatory gift of this magnitude. Trial lawyers are, after all, a key source of revenue for the Democratic Party and the arbitration ban almost exclusively benefits them.
Of course, the CFPB’s regulatory overreach would be easier to swallow if the agency was not an unelected, unaccountable bureaucracy. The CFPB receives its funding as a fixed percentage of the Federal Reserve’s annual budget, exempting the agency from the normal appropriations process. CFPB Director Richard Cordray can only be fired by the president and for just cause—a nearly impossible task in today’s day and age.
According to the U.S. Court of Appeals for the District of Columbia Circuit, the CFPB is “unconstitutionally structured” and a “gross departure from settled historical practice.” As U.S. Circuit Judge Brett Kavanaugh argues, the agency’s structure “poses a far greater risk of arbitrary decision making and abuse of power, and a far greater threat to individual liberty, than does a multi-member independent agency.” Even the Center for Responsible Lending — a liberal advocacy group and one of the agency’s staunchest supporters—expressed concern when the agency was being formed that too much power might be concentrated in a single director, who may or may not be concerned with consumers’ interests. Fortunately, Congress is expected to override the arbitration rule. Sen. Tom Cotton, R-Ark., a member of the Senate Banking Committee, claims that he is already drafting a resolution to kill the mandate. Sen. Pat Toomey, R-Pa., vows to take similar steps.
That’s good news for anyone who supports checks and balances over rogue federal agencies and bad policy.
Jeffrey Joseph is a professor at the George Washington University School of Business.
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