WASHINGTON (Legal Newsline) - The Consumer Financial Protection Bureau’s planned proposal to ban arbitration clauses already has created a sharp divide among special interest groups.
Industry groups -- those focused on the business and financial sectors -- argue the idea, if it comes to fruition, would further open the doors for plaintiffs’ attorneys and end up costing consumers and crippling the economy.
Consumer groups counter that such a rule -- though not as broad as they had hoped and pushed for -- is overdue.
“This makes an obvious wrong, right,” said Lisa Gilbert, an arbitration policy expert with Congress Watch, a division of Public Citizen. Congress Watch works for consumer-related legislation, regulation and policies.
Gilbert says her group was “thrilled” when the CFPB announced its planned proposals last month.
“We’re certainly happy that they saw the logical conclusion, and that this is a huge problem,” she said of arbitration clauses that prohibit class action lawsuits.
She contends there is no question that the CFPB has the authority to make such a rule.
“I think it’s the farthest thing from a federal overreach that you can imagine,” Gilbert said, adding that the bureau has a “clear mandate” under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
F. Paul Bland Jr., executive director of Public Justice, a group that pursues “high impact” lawsuits to combat social and economic injustice, agrees.
“The Dodd-Frank Act really clearly says they can do this -- that the bureau is required to do a study and if that study shows that [arbitration] clauses are harming consumers’ rights, the bureau is required to act,” he said.
“Now, there are a ton of people on the other side who would argue that [Dodd-Frank] never should have passed.”
But unless it’s repealed -- which a number of Republican Presidential candidates have vowed to do if elected in 2016 -- the bureau is acting within the law, Bland contends.
“It can’t be any clearer,” he said.
And neither can the evidence in the bureau’s March report on arbitration clauses, Bland argues. He says the report is “overwhelming proof” that such clauses strip consumers of their rights.
“The thoroughness of the study was extraordinary,” he said. “I think the data told a really compelling story that forces the conclusion that they came to. I think the bureau was forced to do something.”
Though the rulemaking process is “fairly slow” and “painstaking,” Bland says such a rule surely will have an impact.
“I think it’ll take awhile to be felt,” he said, noting that credit card issuers, payday lending companies, auto title pawn lenders and debt settlement firms most likely will be hardest hit.
Irene Leech, who has worked as a consumer advocate for more than three decades, agrees, saying the CFPB’s planned proposal is a long time coming.
“I think there are some ways in which arbitration could be a fair option and be a benefit to businesses and consumers,” said Leech, who teaches consumer studies at Virginia Tech. “Unfortunately, the business community has taken it and been using it in such a way that it’s pretty much a guarantee that consumers are going to lose.”
Especially those consumers who can least afford it, Leech noted.
“Those are the ones who get caught by it the worst,” she said. “Those are the ones who really need the help, because they can pretty much expect to lose [if their cases go to arbitration.]”
Leech, who also serves as president-elect of the American Council on Consumer Interests, said the bureau’s planned proposal should “level the playing field.”
“I think it’s exactly what we’ve needed someone to do for a long time,” she said, adding that ACCI, itself, hasn’t taken a position on the bureau’s study or planned proposals.
But industry groups contend more -- and better -- research is needed before the CFPB proceeds with its rulemaking.
“The study the CFPB has put out is one of the most extensive looks at arbitration, but it’s still an incomplete body of work,” said Dong Hong, vice president and regulatory counsel for the Consumer Bankers Association. “It does not provide a solid foundation to support the kind of rulemaking the bureau is looking to pursue.”
When the CFPB announced its planned proposals in October, CBA President and CEO Richard Hunt said the association -- the so-called “voice of the retail banking industry” -- was “disappointed” in the bureau’s planned ban.
“Arbitration has provided consumers the benefits of quick and easy access to an affordable dispute resolution option for nearly 90 years. As a last resort, if legal recourse is necessary, arbitration has proven to be the best path forward because it is mutually beneficial to all parties -- consumers and lenders,” Hunt said.
“We are disappointed the bureau, despite numerous studies and the CFPB’s own report, is choosing to side with trial attorneys over the interests of consumers.”
Richard Foster, senior vice president and senior counsel for regulatory and legal affairs at the Financial Services Roundtable, points out that the CFPB’s report wasn’t peer-reviewed.
“There needs to be a bit more of a scholarly study done,” he said.
Foster says better consumer education -- on the part of the CFPB -- also is needed.
“We really should be educating people about the value of arbitration,” he said. “Consumers are more likely to get some sort of relief through arbitration than they are through class action lawsuits.”
In July, the FSR -- which lobbies for the country’s financial services industry -- along with the CBA and the American Bankers Association, sent a letter to the head of the CFPB, Richard Cordray, expressing their concerns with the bureau’s study.
The associations also identified several issues with the study that they urged the bureau to “research and analyze” before engaging in any rulemaking. The letter also requested the bureau solicit public comment on the study; however, it did not.
“Substantial data in the Study contradict the argument that arbitration clauses are a barrier to class actions,” the letter states. “The Study found that arbitration was a factor -- and therefore potentially a barrier -- in only 8 percent of the 562 class actions studied. That is because the defendant companies moved to compel arbitration in only 94 of the 562 class actions (16.7 percent), and those motions were granted in only 46 (one-half) of the class actions.
“Thus, arbitration had no causal effect whatsoever on 92 percent of the class actions studied by the Bureau and, therefore, could not have been a barrier to consumers obtaining class relief in the overwhelming number of examples.”
Ted Frank, founder of the Center for Class Action Fairness, which merged with the Competitive Enterprise Institute in October, argues that much of the problem lies in Dodd-Frank itself.
The law, he argues, gave the CFPB too much power.
Frank, who also serves on the executive committee of the Federalist Society Litigation Practice Group, points to federal lawmakers.
“Congress already punted this to this agency,” he said of the bureau’s planned proposals.
“What Congress should be doing is protecting consumer choice rather than authorizing an agency to rip it away.”
Nonetheless, the bureau has done nothing wrong in announcing its proposals -- at least in terms of its statutory authority, Frank says.
“But the question is, is this what they should be doing to help American consumers? And the answer to that is, no,” he said.
From Legal Newsline: Reach Jessica Karmasek by email at firstname.lastname@example.org.