Treasury: CFPB Arbitration Rule Will Bring ‘Extraordinary Costs’

By Jeff Bater

An Oct. 23 Treasury Department report criticizing the “extraordinary costs” of the Consumer Financial Protection Bureau’s arbitration rule adds fuel to efforts to defeat it in Congress and the courts.

The final rule, released in July, is already the target of a lawsuit by a coalition of corporate lobbying groups led by the U.S. Chamber of Commerce. Republican lawmakers want to use the Congressional Review Act (CRA) to repeal the rule while acting Comptroller of the Currency Keith Noreika has said it will increase the costs of credit for consumers.The criticism from the Treasury Department and OCC is “extremely unusual and deliberate” since “federal agencies virtually always keep their disagreements behind closed doors,” Quyen Truong, a partner at Stroock & Stroock & Lavan in Washington and a former CFPB assistant director and deputy general counsel, told Bloomberg Law.

“These reports provide valuable ammunition for both the CRA and litigation challenges to the CFPB’s arbitration rule,” Truong said.

Rehashed Arguments?

The CFPB rule restricts banks and other lenders from forcing customers to resolve disputes through arbitration, potentially making it easier for consumers to sue their banks in class actions.

The CFPB said the new Treasury study rehashes industry arguments “that were analyzed in depth and solidly refuted in the final rule.”

“The Equifax and Wells Fargo cases show how important it is for consumers to be able to band together to take legal action together,” CFPB senior spokesman Sam Gilford said in a statement. “This report and similar industry analyses fail to make the case for allowing companies to continue using these clauses to deny consumers their day in court.”

The Treasury analysis said the rule will generate more than 3,000 additional class action lawsuits over the next five years, imposing more than $500 million in additional legal defense fees and transferring $330 million to plaintiffs’ lawyers.

“The bureau failed to meaningfully evaluate whether prohibiting mandatory arbitration clauses in consumer financial contracts would serve either consumer protection or the public interest,” the Treasury report said.

Among its arguments, the Treasury study said the CFPB did not adequately consider the costs imposed by class action lawsuits that lack merit. In addition, it said the bureau’s attempt to assess costs of additional litigation the rule will produce is incomplete.

Credit Costs

Arbitration clauses are common in contracts for credit cards, checking accounts, payday loans, and other financial products.

In its challenge to the rule, the Office of the Comptroller of the Currency said data provided by the CFPB showed the restrictions on mandatory arbitration clauses will raise the cost of credit by 3.43 percentage points. For an average credit-card rate of 12.5 percent, that increase could be “significant,” Noreika said in a statement Sept. 28.

Noreika had previously argued with CFPB Director Richard Cordray over the rule. The acting OCC chief threatened to hold it up and try to get it shelved by the Financial Stability Oversight Council. But instead, Noreika deferred to Congress and said the OCC would study the rule.

Interest by Republicans in killing the rule using the CRA has been met with resistance from Democrats, as well as hesitancy by some members of the GOP.

Political Cover

Jaret Seiberg, an analyst at Cowen and Company, said the Treasury report offers “some needed political cover for the few Senate Republicans who have been reluctant to vote in favor of the banks.”

“This is a way to argue they were voting for consumers over lawyers,” he wrote in a research note.

The report is also likely to be invoked by the U.S. Chamber of Commerce and other banking groups, which last month asked a federal judge to overturn the rule. The suit called the CFPB an unconstitutionally structured regulatory agency and said the rule is invalid under the Administrative Procedure Act. The latest move in the case came Oct. 20, when the plaintiffs said they will push ahead with a motion for a preliminary injunction against the CFPB rule.

Joseph L. Olson, a partner at Michael Best & Friedrich in Milwaukee, told Bloomberg Law the Treasury report basically calls the entire study done by the CFPB in preparation for the rule.

“This would help a challenge based on the idea that the rule exceeds the authority given by Congress because the agency did not properly do the prerequisite study,” Olson said. “In reality, it will more likely be used by Congress to justify repealing the rule.”

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