Monday, July 17, 2017

The Consumer Finance Protection Bureau’s (CFPB) anti-arbitration rule to facilitate expensive class action litigation to resolve consumer finance disputes in lead-footed courts is like a doctor recommending Chocolate Sundaes to treat obesity.

After March 2018, the CFPB rule would prohibit mandatory arbitration clauses in consumer finance contracts that would preclude customer participation in class action lawsuits. Congress should not tarry in voiding the rule within the 60 day window and expedited procedures of the Congressional Review Act (CRA).

Litigation is deadweight to the economy. It is typically vexing and exorbitantly costly to the litigants. Renowned federal circuit Judge Learned Hand remarked: “I must say that as a litigant, I should dread a lawsuit beyond almost anything short of sickness and death.” Ambrose Bierce in “The Devil’s Dictionary” defined a lawsuit “as a machine which you go into as a pig and come out of as a sausage.”

Class actions logarithmically multiply the vexations and costs of ordinary lawsuits. A plaintiff class size may reach tens of millions and expose the defendant to potentially crippling liability. The costs of notifying and communicating with such huge numbers put class actions out of reach for any but jumbo-sized law firms excited by the prospects of huge legal fees. They often settle class actions to enrich themselves but leave the class plaintiffs in the lurch.

Settlement of the Bank of Boston class action is exemplary. The class attorneys walked away with approximately $9 million in fees while class members had their accounts credited between a paltry $2.19 and $8.76. To add insult to injury, their accounts were also debited for up to $91 to cover the costs of the settlement, i.e., plaintiffs; and defendants’ attorneys’ fees and litigation costs. The outrage is fully described in Kamilewitz v. Bank of Boston Corp. (U.S. Court of Appeals for the Seventh Circuit, August 8, 1996). The number of civil lawsuits filed annually approximates a staggering 15 million. Delay is both pervasive and costly. And justice delayed is justice denied.

Arbitration agreements were conceived to obviate the expense and protracted nature of court litigation.

In a typical agreement, the parties agree to arbitrate disputes in private according to streamlined, inexpensive procedures congruent with the magnitude of the plaintiff’s injury. Arbitrators are selected according to the rules the American Arbitration Association. Like Portia in The Merchant of Venice, arbitrators enjoy wide discretion to season justice with mercy. Their decisions cannot be appealed absent extraordinary improprieties. Life moves on with arbitration. But it is characteristically stuck in the past with lawsuits.

The CFPB’s anti-arbitration rule is a symptom of chronic congressional irresponsibility. Congress routinely gives birth to politically unaccountable regulatory agencies, endows them with sweeping legislative power, and then complains when their offspring misbehave. It is comparable to a parent giving an intoxicated child car keys at night and then bemoaning the inevitable car accident that ensues.

The 2010 Dodd-Frank legislation established the CFPB to be headed by a single director and to be funded by the independent Federal Reserve Board outside the customary appropriations process. The director cannot be removed by the President except for cause. That extraordinary unaccountability for a single director of an agency was held unconstitutional by the United States Court of Appeals for the District of Columbia Circuit in PHH Corp. v. CFPB (October 11, 1996).

Article I of the U.S. Constitution entrusts “[a]ll legislative powers herein granted in a Congress of the United States.” Members of Congress are elected to discharge that responsibility and to defend their handiwork, not to seek refuge from their constituents by cowardly handing over their legislative duties to unelected executive branch agencies.

Accordingly, after Congress voids the CFPB’s anti-arbitration rule under the CRA, it should next abolish the CFPB root and branch as a constitutional excrescence.

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