CFPB mum on comptroller charge that arbitration rule raises credit cost

No response has been made yet by the Consumer Financial Protection Bureau (CFPB) to an allegation that removing arbitration clauses for financial products and services raises costs of credit by about 25%.

Acting Comptroller of the Currency Keith Noreika made the comment last week (Sept. 28) at a conference hosted by the Federal Reserve Bank of Philadelphia.

In his comment, Noreika alleged that the CFPB’s arbitration rule — which prohibits mandatory arbitration clauses by financial companies in their contracts that block groups of consumers from filing class actions in disputes about financial products like credit cards and bank accounts — could result in an increase in credit costs that could be as high as a 3.5% percent annual rate increase for consumers who would be subject to the rule once lenders factor in the cost of class action litigation.

“That’s a 25% increase in credit costs for people who may live week to week. There’s a real, tangible economic effect that it may have on consumers,” Noreika said at the conference, which focused on fintech issues.

The acting comptroller said he based his comments on a study conducted by the Office of the Comptroller of the Currency (OCC) to review the effects of the CFPB’s rule on banks and their customers. “What originally caught my eye…was the potential impact that may have on small institutions … that really may face a massive litigation exposure,” he said.

The bureau’s final rule became effective Sept. 18; compliance is mandatory beginning March 19, 2018.

In a 2015 report to Congress (mandated by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act), CFPB stated that it studied the impact of removing arbitration clauses from consumer financial contracts.

“Using de-identified loan-level data in the Bureau Credit Card Database, which provides monthly data with respect to interest and fees assessed on credit card accounts, we compared changes in consumer prices for at least a subset of the issuers that eliminated their arbitration clauses to changes in prices for issuers that did not change their clauses in the same period,” CFPB stated. “That ‘difference-in-differences’ analysis did not identify any statistically significant evidence of an increase in prices among those companies that dropped their arbitration clauses and thus increased their exposure to class action litigation risk.

“Using the same ‘difference-in-differences’ methodology and looking at two measures of credit availability in the Credit Card Database, we were also unable to identify evidence that companies that eliminated arbitration clauses reduced their provision of credit to consumers relative to companies that did not change their arbitration clauses,” the report stated.

CFPB Arbitration Study: Report to Congress 2015