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From Banking and Finance Law Daily, October 23, 2017

Treasury report: CFPB’s arbitration rule limits consumer choice, expands costly litigation

By Thomas G. Wolfe, J.D.

In conducting an analysis of the Consumer Financial Protection Bureau’s arbitration rule, particularly the prohibition against pre-dispute mandatory arbitration clauses in consumer financial contracts, the U.S. Treasury Department has issued a report concluding that the rule limits consumer choice and expands costly litigation. According to the Oct. 23, 2017, report, the CFPB’s underlying data for its arbitration study "were limited in ways that raise serious questions about its conclusions and undermine the foundation of the Rule itself." The Treasury report further asserts that the CFPB’s study and rule "do not show that the Bureau’s prohibition on arbitration will efficiently improve compliance with the federal consumer financial laws or serve public and consumer interests as the Dodd-Frank Act commands."

As observed by the Treasury in a release accompanying the report, the CFPB also "failed to consider less onerous alternatives to its ban on mandatory arbitration clauses across market sectors."

Report highlights. Among other things, the Treasury’s report, titled "Limiting Consumer Choice, Expanding Costly Litigation: An Analysis of the CFPB Arbitration Rule," maintains that:

  • the Arbitration Rule will impose extraordinary costs—based on the Bureau’s own incomplete estimates;
  • the vast majority of consumer class actions provide "zero relief to the putative members of the class;"
  • for the small percentage of class actions that generate class-wide relief, "few affected consumers demonstrate interest in recovery;"
  • the Arbitration Rule will "effect a large wealth transfer to plaintiffs’ attorneys;"
  • the CFPB did not reasonably consider whether improved disclosures regarding arbitration would "serve consumer interests better than its regulatory ban;"
  • the Bureau did not adequately evaluate "the share of class actions that are without merit;"
  • the CFPB "offered no foundation" for its assumption that the Arbitration Rule will improve compliance with federal consumer financial laws;
  • the Arbitration Rule fails to account for the "major costs" and "inefficiencies" of class action litigation, and did not attempt a "meaningful cost-benefit analysis;" and
  • the Arbitration Rule does not address the "important benefits of arbitration."

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