Seven “defects” of the final rule on “Arbitration Agreements” issued by the Consumer Financial Protection Bureau (CFPB) this summer are outlined in a report issued by the Treasury Department Monday.
In its analysis, Treasury stated that the rule will impose extraordinary costs, that class action lawsuits deliver no relief, and that the consumer bureau failed to show its rule achieves “a necessary increase compliance with the federal consumer financial laws, despite the rule’s high costs.”
The 18-page report addresses the “Arbitration Agreements” final rule, which, according to CFPB, bans companies from using mandatory arbitration clauses to “deny groups of people their day in court” over disputes about financial products, including credit cards and bank accounts.
Under the rule, companies can still include arbitration clauses in their contracts, according to CFPB; but companies subject to the rule may not use arbitration clauses to stop consumers from being part of a group action. The rule includes specific language that companies will need to use if they include an arbitration clause in a new contract, CFPB has said.
In developing the final rule, CFPB relied on the results of a 2015 study it conducted about arbitration clauses in financial product contracts. “The study showed that credit card issuers representing more than half of all credit card debt and banks representing 44% of insured deposits used mandatory arbitration clauses,” CFPB said in a release issued earlier this year in conjunction with the final rule. “Yet three out of four consumers the Bureau surveyed did not know whether their credit card agreement had an arbitration clause. These clauses are not only common and unknown; they are also bad for consumers.”
The Treasury report disputes the CFPB study results, and lays out seven “defects” it found in the rule.
“The data the Bureau considered were limited in ways that raise serious questions about its conclusions and undermine the foundation of the Rule itself,” the report states. “More fundamentally, the Bureau failed to meaningfully evaluate whether prohibiting mandatory arbitration clauses in consumer financial contracts would serve either consumer protection or the public interest—its two statutory mandates. Neither the Study nor the Rule makes that requisite showing.”
The seven defects outlined by Treasury about the rule are:
- The rule will impose extraordinary costs—based on the Bureau’s own incomplete estimates.
- The vast majority of consumer class actions deliver zero relief to the putative members of the class.
- In the fraction of class actions that generate class-wide relief, few affected consumers demonstrate interest in recovery.
- The rule will affect a large wealth transfer to plaintiffs’ attorneys.
- The bureau failed reasonably to consider whether improved disclosures regarding arbitration would serve consumer interests better than its regulatory ban.
- The bureau did not adequately assess the share of class actions that are without merit.
- The bureau offered no foundation for its assumption that the rule will improve compliance with federal consumer financial laws.
“Based on the Bureau’s own data, it is far more likely that the Rule will generate massive economic costs—borne by businesses and consumers alike—that dwarf the speculative benefits of the Bureau’s theorized increase in compliance,” the report states.
Further, the Treasury report says that the rule: Fails to account for major costs and inefficiencies of class action litigation; does not account for important benefits of arbitration; is not based on meaningful cost-benefit analysis.
The report offers no recommendations — to CFPB, Congress or others – with respect to action resulting from the report.