Treasury reports CFPB arbitration rule would impose extraordinary costs

CFPB strongly refutes report's findings

The Consumer Financial Protection Bureau’s arbitration rule is once again under fire – this time from the U.S. Department of the Treasury.

This new rule would ban companies from using mandatory arbitration clauses, allowing consumers to participate in class-action lawsuits.

However, it has been met with strong resistance from every front. The latest attack comes from a new report from the Treasury, which said the rule would impose extraordinary costs.

The Treasury’s report explained that based on the bureau’s own “incomplete estimates,” the rule could generate more than 3,000 additional class-action lawsuits over the next five years, causing affected businesses to spend more than $500 million in additional legal defense fees, $330 million in payments to plaintiff’s lawyers and $1.7 billion in additional settlements.

And these estimates don’t include the increases in state court litigation. The Treasury report stated the CFPB’s data shows these increases in costs will not be absorbed by the affected companies, but rather, passed on to the very consumers the rule is meant to protect.

But the increase in cost isn’t the only downside the Treasury report found. Here are a list of the other affects the CFPB’s rule could have, as laid out by the Treasury:

  • The vast majority of consumer class actions deliver zero relief to the putative members of the class.
  • In the fraction of class actions that generate class-wide relief, few affected consumers demonstrate interest in recover.
  • The rule will affect a large wealth transfer to plaintiffs’ attorneys.
  • The bureau failed reasonably to consider whether improved disclosures regarding arbitration would serve consumer interests better than its regulatory ban.
  • The bureau did not adequately assess the share of class actions that are without merit.
  • The bureau offered no foundation for its assumption that the rule will improve compliance with federal consumer financial laws.

In short, the Treasury explained the CFPB failed to prove the ends would justify the means with its new rule.

But the CFPB highly refutes the Treasury's findings, saying the report rehashes arguments that were already analyzed and refuted. 

“The report by the Treasury Department rehashes industry arguments that were analyzed in depth and solidly refuted in the final rule,” CFPB Senior Spokesperson Sam Gilford told HousingWire. “Our rigorous analysis of the costs and benefits of the rule found that mandatory arbitration clauses allow companies to avoid accountability for breaking the law and cost consumers billions of dollars by blocking group lawsuits.”

“Banks, credit unions, and other companies file class action lawsuits to pursue justice when they are harmed as a group, and our rule restores consumers’ right to do the same,” Gilford said. “The Equifax and Wells Fargo cases show how important it is for consumers to be able to band together to take legal action together. This report and similar industry analyses fail to make the case for allowing companies to continue using these clauses to deny consumers their day in court.”

At the beginning on the month, the U.S. Chamber of CommerceAmerican Bankers Association, the Consumer Bankers AssociationFinancial Services RoundtableAmerican Financial Services AssociationTexas Association of BusinessTexas Bankers Association, and nine chambers of commerce located throughout Texas filed a lawsuit against the rule.

Outside of the finance industry challenging the rule, Congress is also in the process of potentially overturning the rule. According to the most recent update, Senate was seen as likely to vote on repealing the arbitration rule soon since the Republican push for healthcare reform is seemingly over for this year. The House already voted to revoke the rule.

But the rule does still have its defenders. “Overturning the arbitration rule will help banks and payday lenders continue getting away with cheating customers, and I intend to put up one hell of a fight,” said Sen. Sherrod Brown, D-Ohio and ranking member of the Senate Committee on Banking, Housing and Urban Affairs.

While the Office of the Comptroller of the Currency announced it doesn’t plan to stand in the way of the rule being implemented, it welcomes the Congressional repeal. In fact, the OCC recently decided to fact check some of the CFPB’s data on the controversial arbitration rule, and found some of the data wasn’t quite adding up. In its findings, the OCC said that unlike what the CFPB reported, the rule is likely to cause a significant increase in credit costs to consumers.

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