Senior Vice President, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce
SVP, Legal Reform Policy, Institute for Legal Reform
April 04, 2023
The CFPB’s proposed new rule seeks to create a public registry of companies’ terms and conditions—including, most significantly, arbitration agreements— used in contracts with consumers. The premise of this rule is an unjustified attack on arbitration and violates the law by acting outside the limits clearly prescribed by Congress.
What is arbitration?
For nearly a century, arbitration has served as a faster and less expensive alternative to litigation. As a concept arbitration is simple. Where parties agree to it, it allows disputes to be submitted before a professional and neutral private third party called an arbiter to implement a binding dispute resolution without the need for going to court.
When it comes to consumers, oftentimes, resolving disputes in the courts is not in their 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.
Because arbitration doesn’t require parties to go to court the plaintiffs’ bar – attorneys representing clients suing companies – have long been opposed to it. They stand to reap large fees in class action litigation.
The CFPB’s history with arbitration
When Congress enacted the Dodd-Frank Act (Dodd-Frank) in 2010, one of the provisions required the newly-created Consumer Financial Protection Bureau (CFPB) to study arbitration agreements in financial services contracts and report its findings to Congress.
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.
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.”
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.
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.
Five years have passed since the CFPB’s arbitration rule was shut down by Congress. The CFPB, now under the leadership of Director Rohit Chopra, is seeking to bring it back. On January 11th, 2023, the agency issued a notice of proposed rulemaking that would establish a public registry of terms and conditions in millions of consumer contracts. As we pointed out in January, this proposed rule is a thinly veiled attempt to limit arbitration.
Not Supported by the Data
The CFPB’s rule is explicitly based off of a premise that arbitration poses a risk to consumers. At no point, however, does the CFPB provide any empirical analysis to suggest that consumers are at a disadvantage or otherwise worse off under an arbitration agreement compared to litigation.
Fortunately, a recent research paper shines some light on the issue. Using the CFPB’s own complaint registry data, researchers at ndp | analytics tested two hypotheses. First, they found there is no correlation between a firm’s use of arbitration and its likelihood to appear on the CFPB’s complaint registry. Second, they found there is no correlation between a firm’s use of arbitration and being subject to a CFPB enforcement action.
The CFPB’s authority, as stated in the Dodd-Frank Act, to write any rules implicating arbitration agreements is narrow, and was further limited by Congress when they passed a Congressional Review Act resolution. Congress made clear the CFPB should not try to write rules in this area. Despite that, the CFPB continues to engage in a rulemaking effort aimed at doing precisely that. Not only is this legally dubious, it also doesn’t confer any benefit to consumers.
About the authors
Hulse oversees the day-to-day efforts of CCMC including policy development, advocacy, and communications.