In a surprising move, Consumer Financial Protection Bureau Director Richard Cordray made a last-ditch effort to save the bureau’s newly announced arbitration rule as it faces attacks in both houses of Congress.
Cordray authored an opinion piece for The New York Times on Tuesday to try and set the record straight on the intent behind the controversial rule and shoot down all the false statements going around. It's an intriguing development as Cordray is not a regular press commentator in his role at the nation's largest financial regulator; he's granted HousingWire only one interview since taking the role in 2013, for example.
As for the arbitration rule, ever since the CFPB published the rule in July, it has faced a lot of backlash. The new rule mainly pertains to consumer financial products like credit cards and bank accounts that have arbitration clauses in their contracts that prevent consumers from joining together to sue their bank or financial company for wrongdoing.
Interesting enough, the rule does not apply to mortgage finance since Congress already prohibits arbitration agreements in the residential mortgage market.
And even beyond mortgages, in the Military Lending Act, Congress also has prohibited such agreements in many forms of credit extended to servicemembers and their families.
Back when the rule was first announced, Cordray said, "Arbitration clauses in contracts for products like bank accounts and credit cards make it nearly impossible for people to take companies to court when things go wrong. These clauses allow companies to avoid accountability by blocking group lawsuits and forcing people to go it alone or give up. Our new rule will stop companies from sidestepping the courts and ensure that people who are harmed together can take action together."
And now, as Congress is set to overturn the rule, Cordray tried again to defend the necessity behind the rule.
The imminent overturn of the rule isn’t stopping Cordray from making sure people know what the bureau intended when they published the rule.
Here are some small snippets from the opinion piece, titled, “Let Consumers Sue Companies.”
“In 2010, the Consumer Financial Protection Bureau, which I direct, was authorized to study mandatory arbitration and write rules consistent with the study. After five years of work, we recently finalized a rule to stop companies from denying groups of consumers the option of going to court when they are treated unfairly.”
“Opponents have unleashed attacks to overturn the rule, and the House just passed legislation to that end. Before the Senate decides whether to protect companies or consumers, it’s worth correcting the record.”
Cordray used the majority of the blog to address claims from Republicans about what the rule allegedly does.
One example touches on a point House Financial Services Chairman Jeb Hensarling, R-Texas, has made against the rule.
Back when the U.S. House of Representatives passed a “resolution of disapproval” to revoke the rule, Hensarling criticized the bureau, saying, “What the Bureau and the wealthy trial lawyers want is to take away arbitration for consumers and instead force them into class action lawsuits – which, just so happens, to require consumers to hire the very trial lawyers who will benefit most from this rule.”
“Americans were promised a Consumer Financial Protection Bureau but instead they obviously got a Trial Lawyer Enrichment Bureau,” he stated.
Cordray disagreed.
“Our rule does not ban individual arbitration, as our opponents falsely claim. It simply ensures that consumers have the option of joining together to sue companies. Companies and consumers can still use arbitration to resolve their differences, but companies cannot unilaterally block group lawsuits.”
“Opponents also claim that the rule benefits lawyers rather than consumers. In reality, lawyers collect a small portion compared with consumers, and only if they succeed. For every $10 that a company pays out for wrongdoing, we found about $8 goes to consumers and $2 goes to pay legal costs. In any event, banks choose to hire lawyers to file class-action lawsuits, and ordinary people deserve to make the same choice.”
“Another major point Cordray addresses is the debate between individual lawsuits and group lawsuits.”
A previous study from the Mercatus Center at George Mason University, conducted by law professors Jason Johnston and Todd Zywicki, provided an overview and critique of the CFPB’s own report that they said shows such regulation would be counter-productive.
The Dodd-Frank Act required the CFPB to produce a study on American Arbitration Association arbitrations and look for how it could be improved. The problem is the CFPB’s study doesn’t support the action that the CFPB says it intends to take in limiting and overseeing arbitration, Johnston and Zywici said.
“The CFPB’s findings show that arbitration is relatively fair and successful at resolving a range of disputes between consumers and providers of consumer financial products, and that regulatory efforts to limit the use of arbitration will likely leave consumers worse off,” they conclude.
Cordray’s response:
First, opponents claim that plaintiffs are better served by acting individually than by joining a group lawsuit. This claim is not supported by facts or common sense. Our study contained revealing data on the results of group lawsuits and individual actions. We found that group lawsuits get more money back to more people. In five years of group lawsuits, we tallied an average of $220 million paid to 6.8 million consumers per year. Yet in the arbitration cases we studied, on average, 16 people per year recovered less than $100,000 total.
It is true that the average payouts are higher in individual suits. But that is because very few people go through arbitration, and they generally do so only when thousands of dollars are at stake, whereas the typical group lawsuit seeks to recover small amounts for many people.
Still, there are many who disagree. As it stands, under the Congressional Review Act, Congress may overturn a broad range of regulatory rules issued by federal agencies by enacting a joint resolution of disapproval within 60 days of the rules being announced.
The House of Representatives already passed a “resolution of disapproval” to revoke the CFPB’s arbitration rule, and a similar effort is currently underway in the Senate as well. A total of 23 Senate Republicans filed a resolution at the end of July to rescind the CFPB rule.
“The rule is based on a flawed study that leading scholars have criticized as biased and inadequate, noting that it could leave consumers worse off by removing access to an important dispute resolution tool. By ignoring requests from Congress to reexamine the rule and develop alternatives between the status quo and effectively eliminating arbitration, the CFPB has once again proven a lack of accountability,” said Senate Committee on Banking, Housing and Urban Affairs Chairman Mike Crapo, R-Idaho.
With most of the House and Senate against him, Cordray still isn’t standing alone.
Sen. Sherrod Brown, D-Ohio, ranking member of the Senate Committee on Banking, Housing, and Urban Affairs, promised a serious fight in Senate over the rule
“Overturning the arbitration rule will help banks and payday lenders continue getting away with cheating customers, and I intend to put up one hell of a fight,” Brown said.
“Wall Street banks and payday lenders have armies of lobbyists and lawyers on their sides,” Brown added. “Our job is to fight for the servicemembers, student borrowers, seniors, and hardworking Americans who depend on the Consumer Financial Protection Bureau to look out for them.”
To Cordray, despite the discourse over the rule, it should be obvious for everyone to support and concludes the blog stating, “A cherished tenet of our justice system is that nobody should escape accountability for breaking the law. Our rule restores consumers’ legal right to stand up for themselves and have their day in court without having to wait on the government to act. That is an idea everyone should support.”
