Senate should vacate the harmful consumer banking arbitration rule

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When the Senate returns from recess, it will have the opportunity to consider vacating the Consumer Financial Protection Bureau’s final rule related to arbitration agreements. In making that decision, senators must ask whether the rule achieves its intended purpose of increasing compliance with consumer protection laws and improving the treatment of consumers without creating other significant harm and increasing costs.

In my view, the CFPB has failed to provide the data to support that case and failed to disclose the costs to consumers that will likely result from the rule’s implementation. Consumers deserve better, and so do small and regional banks. I first raised concerns about the rule shortly after becoming acting U.S. Comptroller of the Currency in June.

{mosads}As part of our statutorily required consultative role, I had questions about the impact of the rule on the safety and soundness of community banks and its effect on consumers that the CFPB’s analysis did not answer. I asked Director Richard Cordray to hold off publishing the rule so that the Office of the Comptroller of the Currency could conduct an independent review of the data and analysis used to develop and support the rule.

Instead, the CFPB pushed ahead. It published the rule on July 10 and only afterward provided the data and analysis for the OCC’s review. The bureau’s supporting material stated that analysts could not find any evidence to indicate that banning mandatory arbitration agreements would increase costs to consumers.

In September, OCC economists completed their review of the CFPB’s analysis. Their review found the data actually show an 88 percent chance of the total cost of credit increasing, and the expected increase is almost 3.5 percentage points. That means a consumer, living week to week, could see credit card rates jump from an average 12.5 percent to nearly 16 percent. The CFPB failed to disclose that observed effect that was apparent in its data. For an agency that demands transparency from the companies it supervises, the omission is an appalling abdication of the bureau’s responsibility to consumers.

The CFPB’s own data also show that when consumers turn to arbitration, they receive higher settlements more quickly than when they are forced to rely on class action lawyers to fight their case. Class action lawsuits often involve more claimants and may generate big headline settlement figures, but the people making millions are the lawyers when the average individual payout of such suits is just $32. But the likely increase in cost to consumers and the failure to improve settlements are only two concerns.

Community bankers also tell me that the increased costs of fighting spurious lawsuits make it more difficult to operate. Small bankers, already struggling to compete with big banks and nonbank financial service providers, tell me that the cost of defending specious legal claims and the increased risk of such legal battles could threaten their very existence because they just do not have the same financial and legal resources of larger institutions. That means one unintended consequence of the rule may be that only companies big enough to fight frivolous lawsuits will flourish.

Further, there is no evidence to suggest that banks will change their behavior as result of the rule. The CFPB’s data tell us that while 53 percent of credit card issuers use arbitration clauses today, nothing in the data demonstrates that the 47 percent that do not to use arbitration clauses have fewer compliance issues, behave better, or treat their customers better in meaningful ways.

If banning these clauses cannot demonstrably result in better treatment for consumers, we should not implement a rule that will likely result in substantially higher costs to consumers and harm to community banks. Finally, the U.S. Supreme Court repeatedly has upheld the use of arbitration in dispute resolution, and when courts have found arbitration agreements to be “unconscionable,” they have struck them down and allowed class action cases to proceed.

Instead of mandating only one way to resolve disputes, consumers and banks should continue to have the option to resolve contractual differences in the same manner that they do today, and consumers should exercise their market power to choose among institutions that use such clauses and those that do not. Consumers know for themselves what their best options are, and their regulators need to know that too.

Keith A. Noreika is the acting U.S. Comptroller of the Currency. He was previously a partner and member of the financial institutions practice at Simpson Thacher & Bartlett, where he focused on banking regulation.

Tags Arbitration Banking Class Actions Congress Consumer Financial Protection Bureau Consumers Finance Richard Cordray Senate Supreme Court

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