The Consumer Financial Protection Bureau intends to aggressively regulate arbitration agreements in mortgage and other consumer credit contracts, and a new study says it’s a terrible idea based on the CFPB’s own findings.
The new study from the Mercatus Center at George Mason University, conducted by law professors Jason Johnston and Todd Zywicki, provides an overview and critique of the CFPB’s own report that they say shows such regulation would be counter-productive.
The Dodd-Frank Act required the CFPB to produce a study on American Arbitration Association arbitrations and look for how it could be improved. The problem is the CFPB’s study doesn’t support the action that the CFPB says it intends to take in limiting and overseeing arbitration, Johnston and Zywici say.
“The CFPB’s findings show that arbitration is relatively fair and successful at resolving a range of disputes between consumers and providers of consumer financial products, and that regulatory efforts to limit the use of arbitration will likely leave consumers worse off,” they conclude. “Moreover, owing to flaws in the report’s design and a lack of information, the report should not be used as the basis for any legislative or regulatory proposal to limit the use of consumer arbitration.”
The bottom line?
“The CFPB’s arbitration report contains substantial methodological flaws and does not support a ban on arbitration clauses in consumer credit contracts,” the report says. “To the contrary, the data presented in the report show that consumers on balance are better off if they have the arbitration process available to them for dispute resolution.
“Rather than relying on flawed methodology and inaccurate data, the CFPB should focus on the actual benefits arbitration provides to consumers,” the professors say.
Their study provides background on arbitration and litigation options available to mortgage and credit consumers, and highlights key issues with the CFPB’s report:
- Comparing class action settlements with arbitration awards is methodologically flawed.
- The CFPB dramatically overstates the potential benefits to consumers from class action litigation settlements.
- The market solution to inaccurate consumer charges — refunds by businesses who want to keep the consumer’s business — likely deals with the vast majority of small claims disputes over fees and charges. Without considering all of the various means by which consumers receive compensation, including internal dispute resolution processes by banks, it cannot be concluded that arbitration is ineffective for consumers.
- The CFPB’s study shows that individual consumers fare much better in arbitration than many critics of arbitration have claimed and that arbitration is a simple and effective process even for consumers who do not have legal representation.
- Nothing in the CFPB study sheds any light on one of the primary potential benefits of arbitration: that by more accurately and cheaply resolving claims on the merits, arbitration avoids class action settlements generated not by consumer claims that are likely meritorious, but rather by the business need to avoid massive discovery costs.
Rather than using this report as evidence for the need to ban or limit arbitration, Johnston and Zywicki say that the CFPB should continue working to generate a more complete and informative study of the two processes.
“Since the issuance of the study in March 2015, we have continued to invite feedback and to engage with key stakeholders including through roundtable discussions with both industry and consumer groups,” a CFPB spokesperson said. “We will continue to carefully review feedback from stakeholders regarding our research as we move forward with the rulemaking process.”
[Updated 8.11.15 4:31 p.m. ET]