October 24, 2017
Arbitration Rule Hit Job
The department of the Treasury issued a report, Limiting Consumer Choice, Expanding Costly Litigation: An Analysis of the CFPB Arbitration Rule. The report is a hit job on the Consumer Financial Protection Bureau’s new Arbitration Rule. The Arbitration Rule prohibits certain consumer financial product and service providers from barring consumers from participating in class action lawsuits involving those goods or services. It also requires that those providers submit certain records of their arbitrations to the Bureau. Academics (myself included) who study consumer finance generally believe that the Rule benefits consumers.
The Treasury report contains a bunch of weak arguments against the rule. For instance, it argues that “improved disclosures regarding arbitration would serve consumer interests better than its regulatory ban” because such disclosures “would be a lower cost, choice-preserving means to advance consumer protection.”(2) This argument in favor of more and more disclosure as a response to predatory behavior in the consumer financial services market gets trotted out all of the time by opponents of consumer protection. The subprime boom and bust taught us (if we had not learned this before then) that disclosure is not enough. Every homeowner has had the experience of signing document after document without having the faintest idea of what they said. Disclosure is overwhelmed by complexity and consumer finance transactions are quite complex (have you read your credit card disclosures recently?).
Here are the other key arguments in the Treasury report for your consideration:
- The Rule will impose extraordinary costs—based on the Bureau’s own incomplete estimates.
- 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 recovery.
- The Rule will effect a large wealth transfer to plaintiffs’ attorneys.
- 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. (1-2)
On my first read, I do not find them to be convincing reasons to get rid of the Rule. With time, others will respond to them in greater depth. This document, which references no authors, no internal institutional review process and no consultation with stakeholders, strikes me as nothing more than flimsy cover for a takedown of the Rule.
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