Earlier this year the Consumer Financial Protection Bureau (CFPB) proposed a new rule that would harm both consumers and businesses. This rule would ban the commonly used arbitration clauses in consumer finance contracts.
A report published by the Competitive Enterprise Institute (CEI) examined the rule and how by banning these clauses the CFPB is effectively forcing consumers to forgo the quick and relatively cheap option of arbitration and instead pursue the long and more cumbersome process of filing class action lawsuits. Such lawsuits only benefit high-priced lawyers at the expense of both consumers and businesses.
CFPB Director Richard Corday describes arbitration clauses as “contract gotcha that effectively denies groups of consumers the right to seek justice”. However, this statement could not be further from the truth.
According to the CFPB’s own study, arbitration often results in better outcomes for consumers. Class action lawsuits on the other hand are only approved by the courts 20 percent of the time. Those lucky enough to be part of the 20 percent of approved cases must wait an average of 3 years in order to see any kind of settlement while those involved in arbitration wait an average of 6.9 months.
That CFPB’s study also found based on a survey of over the 400 class actions against financial firms, the average payout to class members was less than $2.00 a person, much lower than typical payouts under the arbitration process.
The arbitration rule is currently slated to be finished in 2017, but lawmakers are concerned the CFPB could look to push through the rule this year to circumvent President Trump blocking finalization. Such a “midnight regulation” from the CFPB would be ill advised and the Bureau should instead freeze its rulemaking on this issue and others until the new administration takes office.
Simply put, the arbitration rule is another example of the agency’s attempt to overregulate the financial services industry at the expense of consumers and businesses. In the 6 years that the agency has existed it has issued nearly 50 rules that have cost Americans and businesses billions of dollars in additional costs. Fortunately, next year consumers will have both a Congress and executive branch dedicated to protecting their interests and enforcing oversight of the CFPB.
Photo Credit: Brian Turner