House panel questions legitimacy of CFPB arbitration rule

A House panel on Wednesday questioned whether the Consumer Financial Protection Bureau (CFPB) overstepped its bounds with a rule cracking down on waivers meant to keep financial institutions out of court. 

The CFPB earlier this month proposed a rule banning forced arbitration clauses in contracts for financial products.

{mosads}Such clauses prevent consumers from suing or joining class-action lawsuits against companies, a practice slammed by consumer advocates and championed by business groups.

The rule is based on an 2015 CFPB study, mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, that found consumers reaped much smaller rewards from arbitration than litigation. 

But Republicans and arbitration defenders on Wednesday said the study’s findings didn’t support the CFPB rule and failed to meet Dodd-Frank’s standards for action. 

”I have serious doubts that the bureau has met the statutory requirements,” said Rep. Randy Neugebauer (R-Texas), chairman of the House Financial Services Committee subpanel on financial institutions and consumer credit. 

Dodd-Frank mandated the CFPB to regulate forced arbitration if it’s in the “public interest and for the protection of consumers.”

But Republicans and witnesses representing business groups and banks said the CFPB’s study failed to show that eliminating arbitration clauses meets that standard.

CFPB “failed to articulate a rational connection,” said Neugebauer, who said the proposed rule was a “clear error in judgement” that would steal retribution away from low-income consumers.

Arbitration defenders and consumer watchdogs scuffled over how effective each process was at giving consumers what they deserve. 

Jason Johnston, a University of Virginia law professor law professor, claimed 63 percent of consumers receive an award or settlement within five months through arbitration. He said the CFPB didn’t study enough cases to make such broad action.

“The evidence that they found does not justify what they did,” said Johnston. “Very little is made of the general data.”

Dong Hong, vice president and regulatory counsel for the Consumer Banking Association, testified that class-action suits can take up to two years to yield an average settlement of $32.

“The CFPB’s own study shows consumers are better off taking their dispute to an arbitrator,” argued Hong.

Democrats dismissed those arguments, claiming arbitration clauses were a tool for financial institutions to skip court and avoid accountability.

“Those are the words the corporations use to promote the arbitration fine print buried at the end of contracts that consumers sign,” said Rep. Lacy Clay (D-Mo.), the subcommittee’s ranking Democrat. “We should be using words like ‘unfair,’ ‘biased,’ ‘expensive,’ ‘opaque’ and ‘discouraging.’ “

“The choice is not between arbitration and litigation,” added Rep. Brad Sherman (D-Calif.). “The choice is between litigation as a class-action and absolutely no remedy.”

Arbitration defenders also warned that eliminating such clauses would ramp up costs for financial products without any benefits for consumers, since institutions would have to cover their court costs.

The rule “will harm the very consumers the bureau is charged with protection,” said Andrew Pincus, a partner at Mayer Brown speaking for the U.S. Chamber of Commerce.

Consumer watchdogs shot down that criticism as “scare tactics.”

“That’s not the actual system that we’re talking about,” said F. Paul Bland Jr., executive director of Public Justice. “What the banks and payday lenders want is for cases to go away.”