Limiting Consumer Choice, Expanding Costly Litigation: An Analysis of the CFPB Arbitration Rule

US Treasury Dept
Limiting Consumer Choice, Expanding Costly Litigation: An Analysis of the CFPB Arbitration Rule
Oct 23 2017
https://www.treasury.gov/press-center/press-releases/Pages/sm0186.aspx

WASHINGTON – The U.S. Treasury Department today released a report that examines the Consumer Financial Protection Bureau’s (CFPB) arbitration rule. The Treasury report delves into the analysis CFPB used to prohibit mandatory arbitration clauses.  It outlines important limitations to the data behind CFPB’s rule and explains that CFPB did not appropriately consider whether prohibiting arbitration clauses would advance consumer protection or serve the public interest.

The Treasury report found that:

• The CFPB’s rule will impose extraordinary costs—generating more than 3,000 additional class action lawsuits over the next five years, imposing more than $500 million in additional legal defense fees, and transferring $330 million to plaintiffs’ lawyers;

• The CFPB’s data show that the vast majority of class action lawsuits deliver no relief to the class—and that consumers very rarely claim relief available to them;

• The CFPB did not show that its rule will achieve a necessary increase compliance with the federal consumer financial laws, despite the rule’s high costs; and

The CFPB failed to consider less onerous alternatives to its ban on mandatory arbitration clauses across market sectors.

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Nearly a century ago, Congress made private agreements to resolve disputes through arbitration “valid,irrevocable, and enforceable” underthe Federal Arbitration Act.

This longstanding federal policy in favor of private dispute resolution serves

the twin purposes of economic efficiency and freedom of contract. In the Dodd-

Frank Act, Congress authorized the Consumer Financial Protection Bureau to limit or ban the use of arbitration agreements in consumer financial contracts only if the Bureau concludes that its restrictions are “in the public interest and for the protection of consumers.”

Against this background, in July 2017, the Bureau issued its final rule (the “Rule”) prohibiting consumers and providers of financial products and services from agreeing to resolve future disputes through arbitration rather than class-action litigation.

The Rule follows the Bureau’s study of arbitration,

summarized in a 2015 report to

Congress. The Arbitration Study attempted

an empirical analysis of

both the arbitral awards and

class action settlements that consumers obtained for a variety of claims.

But the data the Bureau

considered

were

limited in ways that raise

serious questions about its conclusions

and undermine

the foundation of the Rule its

elf

. More fundamentally, the Bureau failed to

meaningfully

evaluate

whether

prohibiting mandatory

arbitration clauses in consumer financial contracts would serve

either consumer protection

or

the public interest

—its two statutory mandates. Neither the St

udy

nor

the Rule

makes

that

requisite

showing. Instead,

on closer inspection,

the Study and the Rule

demonstrate that:

•

The Rule will impose extraordinary costs—based on the Bureau’s own incomplete

estimates

.

The

Bureau

projects that

the

Rule

will

generate more than 3

,000

additional

class action lawsuits

over the next five years

. Meanwhile,

affected businesses

will spend more than $500

million

in additional legal defense fees, $330 million in payments to plaintiffs’ lawyers,

and $1.7

billion in additional settlements

.

Remarkably,

the Bureau’s

estimates do not account for

expected

increases in state court litigation.

Affected businesses are unlikely to simply absorb

these new financial burdens.

T

he Office of the Comptroller of the Currency recently reported

that

the

Bureau’s own data show that the Rule’s costs will

very

likely be passed

through

to

consumers in the form of higher borrowing costs

for credit card users, among other burdens

.

•

The vast m

ajority of consumer class actions deliver zero relief to the putative members of

the class.

According to the Bureau’s own data, only 13% of consumer class action lawsuits

filed

result in class

-wide recovery—

meaning tha

t in 87% of cases, either no plaintiffs or only

named plaint

iffs receive relief of any kind.

The Bureau projects that, out

of the 3,000

additional class actions the Rule will generate, four

in five

cases

will

yield

no

recovery for the

putative class of con

sumers.

•

In the fraction of class actions that generate class

-wide

relief, few affected consumers

demonstrate interest in recovery.

On average, only

4% of plaintiffs entitled

to claim

class

settlement funds actually do so. This suggests that consumers value class action litigation far

less than the Bureau believes they should.

This is not surprising given that plaintiffs who do

claim funds from class action settlements receive, on average, $32.35 per person.

2

•

The

Rule will effect a large wealth trans

fer to plaintiffs’ attorneys

.

O

n average, plaintiff

-

side

attorneys’ fees account for approximately 31% of the

payments

that

plaintiffs receive from

class action settlements

—and in many types of cases, much more. In an average case,

plaintiffs’ attorneys

collect

more than $1 million; actual plaintiffs receive $32 each.

The

Bureau’s data indicate that the Rule will transfer an additional $330 million over five years

from affected businesses to the plaintiffs’ bar.

•

The Bureau failed reasonably to consider whether improved disclosures regarding

arbitration would serve consumer interests

better

than its regulatory ban.

The Bureau’s own

data show that the

financial

marketplace offers choices to consumers

regarding arbitration

; the

vast majority of contracts in the major

market segments

do not contain

mandatory arbitration

clauses.

If the Bureau is concerned that consumers are unaware of arbitration clauses, more

prominent disclosure of such clauses would be a lower cost, choice

-preserving

means to

advance consumer protection

.

•

The Bureau did not adequately

assess the share of class actions that are without merit.

Courts and commentators have long recognized that defendants settle even

meritless lawsuits.

As Justice Ruth Bader Ginsburg has explained, the class mechanism

“places pressure on the

defendant to settle even unmeritorious claims.”

1

The Bureau

overlooked

the force of this

argument

and failed to assess the costs of meritless litigation that the Rul

e will generate

.

•

The Bureau offered

no foundation for its assumption that the Rule will

improve

compliance

with federal consumer financial laws.

The Bureau “

assumes

that the current level of

compliance in consumer finance markets is generally sub

-optimal”

2

and insists that

the

Rule

will protect consumers by remedying that assumed compliance gap.

But

after years of study,

the Bureau has identified no evidence indicat

ing that firms that do not use arbitration clauses

treat their customers better or have higher levels of compliance with the law. As a result, the

Bureau cannot credibly claim that the

Rule would yield

more efficient levels of

compliance.

In view of these defects, it is clear that

the Rule does not satisfy

the statutor

y prerequisites

for banning

the use of arbitration agreements

under the Dodd-

Frank Act

. The Bureau has not made

a reasoned showing that increased consumer class action litigation will

result in a net

benefit

to

consumers or to

the public as a whole. B

ased on the Bureau’s own data, it is far more likely that

the Rule will generate massive economic costs

—borne by businesses and consumers alike

—that

dwarf the

speculative benefits of

the Bu

reau’s theorized increase in

compliance

.