October 27, 2017

Chairman Crapo on CFPB Arbitration Rule

Washington, D.C. – Today, Senate Republicans, led by Banking Committee Chairman Mike Crapo (R – Idaho), voted to overturn a controversial rule that would ban certain financial contracts from including arbitration agreements that prevent consumers from filing or participating in class action lawsuits. Below are Chairman Crapo's comments on the Senate Floor delivered before the final vote. 

Chairman Crapo’s remarks, as prepared for delivery:

 “Mr. President, I rise today to discuss the flawed and harmful CFPB arbitration rule and urge my colleagues to support the resolution to disapprove it.

 “On July 10, the CFPB finalized a rule prohibiting the use of pre-dispute arbitration agreements that prevent consumers from participating in class action lawsuits.

 “The rule also furthers the CFPB’s data collection efforts by requiring companies to submit to the CFPB certain records, including arbitral and court records.

 “The Dodd-Frank Act mandated that the CFPB study the use of pre-dispute arbitration agreements in consumer financial contracts.

 “Dodd-Frank also set forth when the CFPB was authorized to prohibit, impose conditions upon, or limit the use of such agreements; namely if the CFPB found  that any such action was 1) in the public interest and for the protection of consumers, and 2) consistent with the CFPB study’s findings.

 “It is clear that the CFPB failed on both counts.

 “In 2015, the CFPB released its final study and report on pre-dispute arbitration to Congress.

 “To say that the study was flawed is an understatement.

 “It was panned for its questionable analysis, data, and conclusions by the public, academics, consumers, businesses, federal regulators, and members of Congress, who noted that it could make consumers worse off by removing access to an important dispute resolution tool.

 “I will spend a few minutes delineating some of the valid criticisms, since the study was the basis for the final rule.

 “First, the study only compared class action settlements with arbitration awards.

 “By only looking at arbitration awards and not consumer recovery in arbitration settlements that occur before awards, the CFPB ignored substantial evidence of arbitration agreements benefitting consumers.

 “The analogy that comes to mind is thinking about how much money you have in the bank by looking at your checking account while ignoring what is in your savings account. 

 “Given this methodological flaw, it is difficult to make apples-to-apples comparisons about class action versus arbitration, but the Wall Street Journal’s Editorial Board made a helpful observation:

 ‘Of the 562 class actions the CFPB studied, none went to trial. Most were dismissed by a judge, withdrawn by the plaintiffs or settled out of class.

 ‘The putative class victims received benefits in fewer than 20 percent of cases, and the average cash recovery was—wait for it—$32. Lawyers took an average 24 percent cut of the cash payments, about $424 million, in cases that settled.

 ‘Meanwhile, consumers were awarded relief in 32 of the 158 arbitration disputes the bureau examined, and rewards averaged $5,389—or about 57 percent of every dollar claimed.

 ‘Consumers who used arbitration received relief on average in two months after filing claims. Class-action members had to wait two years.’

 “Clearly, the CFPB cherry-picked the information it liked, and omitted what it did not.

 “The CFPB and its advocates of the rule also argue that the rule restores consumers’ day in court.

 “But again, the CFPB’s study explicitly states that no class actions filed during the time period that the CFPB studied, 2010-2012, went to trial. 

 “The study added that most arbitration agreements in consumer financial contracts contain a ‘small claims court carve-out’ that provides the parties with a contractual right to pursue a claim in small claims court. 

 “The CFPB claims that the rule will deter companies from bad behavior in the face of an increase in class action lawsuits.

 “Yet, there is no evidence to that effect.

 “A report released by the Treasury Department this week notes that ‘after years of study, the Bureau has identified no evidence indicating that firms that do not use arbitration clauses treat their customers better or have higher levels of compliance with the law.’

 “The truth is, rather than deterring companies from bad behavior, this rule will encourage frivolous lawsuits that companies feel compelled to settle, shifting hundreds of millions of dollars from businesses to plaintiff attorneys.

 “Many members of Congress have weighed in on both the CFPB’s arbitration study and how the final rule was developed.

 “In 2015, 86 members of the House and Senate wrote to Director Cordray asking that he re-open the arbitration study due to concerns about the Bureau’s process.

 “In 2016, 140 members of the House and Senate again wrote to Director Cordray raising concerns about the CFPB’s proposed rule and asking the Bureau to re-examine their approach to arbitration.

 “Unfortunately, the final rule was still issued without addressing any of the concerns identified.

 “Federal financial regulators have raised a number of concerns with the assumptions used in the development of the rule and the lack of consideration for alternative approaches.

 “Recently, the Treasury Department issued an analysis that concluded the CFPB did not sufficiently substantiate with any quantitative assessment its assumption that the current level of compliance in consumer financial markets is “generally sub-optimal”.

 “Meaning, the CFPB has not adequately demonstrated the rule will solve the assumed problem it set out to fix.

 “Treasury also noted the CFPB could have considered less costly alternatives, including more effectively informing consumers, clearer disclosure, or more targeted regulation.

 “However, it failed to do so, opting instead for an all-or-nothing approach. 

 “The Acting Comptroller of the Currency has also raised serious concerns with the rule and asked for the opportunity to review the CFPB’s data and analysis to determine the potential impact of the rule.

 “According to a recent letter by the Acting Comptroller of the Currency, ‘Eliminating the use of this tool could result in less effective consumer protection and remedies, while simply enriching class-action lawyers.  At the same time, the proposal may potentially decrease the products and services offered to consumers, while increasing their costs.’

 “The CFPB attempted to estimate the increase in costs, albeit incompletely, associated with the final rule that could be passed through to consumers.

 “The CFPB estimates in its final rule that companies will incur $2.6 billion in additional fees and settlements over the next five years, $330 million of which will go directly to plaintiff lawyers.

 “As astounding as these numbers are, this estimate only includes federal court cases and fails to consider state cases.

 “Treasury’s analysis also notes that the CFPB appears to understate the share of class actions dismissed by courts, thus failing to adequately consider costs of meritless cases.

 “According to Treasury, assuming that just 10 percent of class action cases are meritless, ‘the Rule would have to reduce harm to consumers by $500 million per year to demonstrate any net benefit to society. The Rule does not come close to making that showing.’

“The OCC recently shed more light on how the CFPB’s final rule could impact the cost of consumer credit.

 “While the CFPB said that it could not identify any evidence to that effect, it did concede that ‘this does not mean that no pass-through [to consumers] occurred; it only means that the analysis did not provide evidence of it’ and that ‘most providers will pass through at least portions of some of the costs.’

 “Using the same data, the OCC conducted its own analysis and found ‘a strong probability of a significant increase in the cost of credit cards as a result of eliminating mandatory arbitration clauses.’

 “In fact, the OCC found an 88 percent chance that the total cost of credit will increase and a 56 percent chance that costs will increase by at least 3 percent.

 “As Acting Comptroller Noreika noted, that means that a consumer, living week to week, could see credit card rates jump from an average of 12.5 percent to nearly 16 percent.

 “He correctly added that ‘to the extent the CFPB’s arbitration rule is being undermined, it is undermined by the CFPB’s own data and the working paper on which the CFPB relied.’

 “Community banks and credit unions are also raising concerns with the rule.

 “The Independent Community Bankers Association opposes the arbitration rule because ‘[c]ommunity banks are relationship lenders, many of which have served their communities for multiple generations. 

 ‘A reputation for fair dealing is essential for their success, and abusive consumer practices have absolutely no place in their business model.  Community banks invest heavily in resolving customer complaints amicably and on a timely basis.’

 “In addition, the Credit Union National Administration or CUNA opposes the arbitration rule because ‘[a]mong the many consumer protections associated with the mission of credit unions is the high-quality service they provide to their members, which has prompted a successful system for quickly and amicably resolving disputes in the limited instances where they arise.’

“While the CFPB claims that many community banks and credit unions do not even have these clauses, I have heard from many small financial institutions that this rule would have a significant impact on their operations.

 “On July 25, the House, by a vote of 231-190, voted to overturn the rule.

 “The Administration weighed in on the House’s effort saying ‘this legislation would protect consumer choices by eliminating a costly and burdensome regulation and reining in the bureaucracy and inadvisable regulatory actions of the CFPB.’

 “It is alarming that the CFPB moved forward with a final rule in this manner, especially in light of the numerous concerns expressed.

 “The CFPB could have made recommendations to improve the arbitration process or clauses if it identified concerns.

 “Aside from the substantive concerns about this specific rule, it brings the CFPB’s structure and accountability back into focus.

 “The CFPB is unlike any other federal agency.

 “Since the creation of the CFPB, we have argued that far too much power is vested in the CFPB director without any effective checks and balances.

 “Last year, the D.C. Circuit Court of Appeals ruled that the CFPB, as currently designed, is unconstitutional.

 “The ruling stated that Congress erred in creating a far-reaching agency that is led by a single director.

 “In particular, the ruling noted that ‘the CFPB’s concentration of enormous executive power in a single, unaccountable, unchecked Director not only departs from settled historical practice, but also poses a far greater risk to arbitrary decision making and abuse of power…’

 “The director is further insulated by being able to automatically draw funds from the Federal Reserve, subject to an annual cap, rather than being required to justify the CFPB’s annual funding needs to Congress. 

 “The Court’s decision mirrored arguments from Members of Congress that the director has wide-ranging power with little oversight and is a gross departure from settled historical practice of having multi-member commissions at agencies to keep them in check.

 “In fact, the Senate repeatedly urged the prior Administration to impose checks on the CFPB.

 “In 2011, 44 Senators wrote to the Administration expressing concern about the lack of accountability in the structure of the CFPB.

 “In 2013, 43 Senators wrote to the Administration once again.

 “In each instance, we advocated for the establishment of proper checks and balances for the agency.

 “Some of the specific checks and balances for which we advocated included: replacing the single Director with a bipartisan commission to run the CFPB; subjecting the CFPB to appropriations; and establishing safety-and-soundness checks for prudential regulators.

 “Despite our efforts, this agency remains just as powerful and unaccountable today.

 “And this rule is just the most recent demonstration of their continued lack of accountability.

 “Now, the Senate has the opportunity to take another step toward holding this agency accountable.

 “The CFPB failed to demonstrate that consumers will fare better in light of its arbitration rule. In fact, they may be worse off. 

 “I urge my colleagues to help ensure consumers maintain access to quick, inexpensive and efficient mechanisms of dispute resolution by overturning this rule.”