CFPB Arbitration Rule Complicates the Class Action System

Arbitration isn’t generally a hot topic, but it’s been top of mind for many consumers since the Consumer Financial Protection Bureau (CFPB) finalized a rule that effectively bans arbitration in consumer contracts. Proponents claim the rule was designed to encourage class actions and give consumers their “day in court.” It sounds nice, but the reality is far different and hardly the pro-consumer nirvana that the CFPB describes. 

Fortunately, the Senate has an opportunity to undo this bad rule and protect American consumers. Here are a few things lawmakers should know as they are deliberating.

Proponents of the CFPB’s arbitration rule assert with regularity that it will allow consumers to have their “day in court” through class action lawsuits. But in fact, arbitration is a better – not to mention quicker – way to resolve disputes than class action litigation. Arbitration not only rewards more money on average than class action litigation, but normally, an arbitration can be resolved in months instead of the years it takes to litigate a class action. Plus, there’s no guarantee that a consumer’s claim will be eligible for class action treatment; our analysis of the CFPB’s Complaint Database shows that 90 percent of claims are individual. In most cases, consumers preserve the right to go to small claims court. 

There are a few flaws in the CFPB’s “day in court” argument: As it was developing its arbitration rule, the CFPB conducted a study that showed that 87 percent of people in class action lawsuits received nothing. That’s right. Nothing. That’s not much of a “day in court.” And in the few instances where consumers actually recovered money in class action suits, the CFPB’s study showed that they received $32 on average. Again, not exactly a “day in court” that benefits consumers.

What’s more? At the end of this “day in court,” it’s the trial bar that takes home the real cash – not consumers. As a consumer is depositing her $32, the class action attorneys are raking in $1 million on average. Compare that to arbitration, where consumers receive an average of nearly $5,400, according to the CFPB.

Not only do consumers receive less money on average in class action lawsuits, but a recent study by the Office of the Comptroller of the Currency (OCC) showed that if arbitration is eliminated, consumers could face “a significant risk of a substantial rise in the cost of credit.” That’s right. More bad news for consumers in light of the CFPB’s arbitration rule.

The OCC’s study showed that the CFPB’s arbitration rule could hit consumers with as much as a 3.5 percent APR increase, a 25 percent hike. Is that what consumers need at a time when the Federal Reserve found that 44 percent of Americans cannot cover an emergency $400 expense?

As Keith Noreika, the acting comptroller, put it, “There’s a real, tangible economic effect that it may have on consumers.”

Based on this evidence from the OCC and the CFPB itself, it’s clear that under the CFPB’s rule, consumers will not be made whole, they’ll be stuck in an inefficient and complicated class action system, and it will cost more to obtain credit. That’s a great deal if you’re a trial lawyer, but not if you are a consumer or business.

We urge the Senate to follow the House and pass a resolution to do away with this rule for good. To do otherwise and allow the CFPB to continue with its farcical definition of a “day in court,” will be a gift to the class action trial bar. It certainly won’t be a victory for consumers or the business community.