U.S. Treasury Takes Aim at CFPB Arbitration Rule

On October 23, the U.S. Department of the Treasury released a report criticizing the impact of the Consumer Financial Protection Bureau’s (CFPB) recent rule prohibiting mandatory arbitration clauses in financial services contracts. The Bureau’s original rule, released on July 10, banned contracts from mandating the use of arbitration in disputes, in favor of pushing consumers towards class-action litigation.

Now, the Treasury has weighed in. Their report, entitled, “Limiting Consumer Choice, Expanding Costly Litigation: An Analysis Of The CFPB Arbitration Rule,” casts doubt on the Bureau’s justification for its rule.The Treasury report comes on the heels of a finding by the Office of the Comptroller of the Currency that the Arbitration Rule has an 88 percent chance of raising the cost of consumer credit.

The Treasury report described the data the Bureau used in its report on arbitration, “limited in ways that raise serious questions about its conclusions and undermine the foundation of the rule itself.” The report continued, “the Bureau failed to meaningfully evaluate whether prohibiting mandatory arbitration clauses in consumer financial contracts would serve either consumer protection or the public interest—its two statutory mandates.” The report went on to identify seven problems with the CFPB’s rule. These problems that Treasury cited are as follows:

  • The Arbitration Rule will result in extraordinary legal costs for companies, and those costs will be passed on to the consumer.
  • Per the CFPB’s own data, the vast majority of class-action suits “deliver zero relief,” to the affected plaintiffs.
  • Very few consumers who are technically entitled to claim a reward from a class-action lawsuit actually do so.
  • Consumers’ attorneys, rather than consumers themselves, will be the primary financial beneficiaries of increased litigation.
  • The Bureau did not address the proportion of class-action suits that are without merit.
  • The Bureau hasn’t proved that the rule will increase levels of compliance with the law, nor that firms that use mandatory arbitration clauses have lower levels of compliance.
  • The Bureau did not consider whether improved and advanced disclosures around arbitration would be a better route than a ban.
  • The last on the list of Treasury’s concerns is a notable one. The report’s full explanation of this issue is as follows:

    The Bureau failed reasonably to consider whether improved disclosures regarding arbitration would serve consumer interests better than its regulatory ban. The Bureau’s own data show that the financial marketplace offers choices to consumers regarding arbitration; the vast majority of contracts in the major market segments do not contain mandatory arbitration clauses. If the Bureau is concerned that consumers are unaware of arbitration clauses, more prominent disclosure of such clauses would be a lower cost, choice-preserving means to advance consumer protection.

    Consumers’ Research published an op-ed on August 21 in which we noted this very problem, and note that the Bureau should have considered additional disclosure or consumer education rules:

    If the CFPB was concerned that consumers are unaware of how arbitration clauses worked, the bureau could have proposed a rule requiring additional disclosure or more comprehensive consumer education. However, the agency instead sought to prohibit mandatory arbitration altogether and open a Pandora’s Box of class-action lawsuits.

    Read the Treasury’s full report here. Read Consumers’ Research’s op-ed on the Arbitration Rule here.

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