Bill Hulse Bill Hulse
Vice President, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce
Matt Webb
SVP, Legal Reform Policy, Institute for Legal Reform

Published

October 06, 2022

Share

When Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) in 2010, one of the provisions contained in the legislation required the (then newly created) Consumer Financial Protection Bureau (CFPB) to study arbitration agreements in financial services contracts and report its findings to Congress.

Arbitration is a fast and inexpensive alternative to litigation where a neutral third party oversees a case and determines a legally binding outcome. When it comes to consumers resolving legal disputes, arbitration has been shown to be a much better alternative than class action litigation.

Oftentimes, the litigation process is not in the consumer’s best interest. Many consumers are rarely able to sue in court on their own because individual litigation is time-consuming, and in many cases, will cost more in attorneys’ fees (not to mention the costs for gathering evidence, hiring expert witnesses, etc.) than the amount of the consumer’s dispute. Furthermore, because most consumer disputes are highly individualized, they also aren’t eligible for treatment as a class action.

However, on the other side is the plaintiffs’ bar. They stand to reap large fees in class action litigation and therefore they used the reporting requirement in Dodd-Frank to try to build a case against arbitration in order to provide the basis for more class action litigation and by extension, more fees for them.

What The CFPB Arbitration Study Found

The CFPB published its arbitration study in 2015, and while the study ignored many of the practical benefits of arbitration, it did find that in instances where class action suits actually proceed to trial, trial lawyers make $1 million per case, and only about 4% of consumers ever take the steps necessary to claim class action awards. The awards themselves typically average about $32. The study also showed that almost 90% of cases filed as class actions result in no class recovery whatsoever, and that consumers receive 170 times more financial compensation in arbitration than they do in class actions.

In short, the Bureau’s own study showed exactly what the business community already knew – that arbitration is better for consumers and that class action lawsuits are a broken system that primarily benefits wealthy lawyers, not consumers.

CFPB Moves Ahead Anyway

Despite the findings, the CFPB under then-Director Richard Cordray decided to move ahead with a rule banning arbitration clauses in financial contracts in 2017.

Separately, the Treasury Department conducted its own analysis of the rule in 2017, which found that, “[t]he CFPB’s rule will impose extraordinary costs – generating and transferring $330 million to plaintiffs’ lawyers.”

Fortunately, Congress passed a Congressional Review Act resolution in 2017 that struck down the CFPB’s rule. That same law also prevents the CFPB from issuing “substantially similar” rule meaning the CFPB’s legal authority to issue a new rule is dubious at best. 

CFPB Alludes to New Arbitration Rule

Almost five years to the date since the CFPB’s arbitration rule was shut down by Congress, the CFPB, now under the leadership of Director Rohit Chopra, is looking to bring the rule back from the dead. Chopra, under pressure from progressive groups, recently gave a speech where he alluded to the possibility of promulgating a new arbitration rule.

If the CFPB decides to go down this route and attempts to issue a new arbitration rule, consumers and businesses will lose. These contracts do not require more regulation.

The CFPB tried once to give a windfall to the plaintiffs’ class action trial bar. Congress shut them down. The CFPB would be wise not to try to it again.

About the authors

Bill Hulse

Bill Hulse

Vice President, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce

Bill Hulse is vice president at the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness.

Read more

Matt Webb

SVP, Legal Reform Policy, Institute for Legal Reform