Congress deserves applause for repealing an obtuse rule prohibiting agreements requiring arbitration to resolve consumer finance disputes issued by the Consumer Protection Finance Board (CPFB). The rule’s chief beneficiaries were trial lawyers, not bank customers.
On the other hand, the Oct. 25 repeal highlights the chronic irresponsibility of Congress in delegating its legislative powers to executive agencies. The repeal would have been unnecessary if Congress had exercised rather than given away its authority over consumer finance.
On July 19, 2017, the CFPB issued a rule prohibiting mandatory arbitration provisions in consumer financial services contracts that would preclude their participation in class action lawsuits to resolve disputes. Congress delegated authority to the CFPB in the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act to prohibit “unjust, deceptive, or abusive” practices.
The lamp of experience should guide political footsteps. Thousands of years of experience fortified by Adam Smith’s Wealth of Nations confirm that consumer welfare is optimized by open markets in which business rivals compete for patrons. That presumption should only be overcome if the government unearths credible evidence of collusion among competitors or monopoly power.
The CFPB argued that mandatory arbitration provisions were unfair because customers have no choice. But they do. Only 7 percent of community banks use them, and only 50 percent of credit card issuers do.
If consumers strongly desire a class action option to resolve disputes, they can patronize financial institutions accordingly. The CFPB adduced no evidence that financial institutions had agreed among themselves to insist on mandatory arbitration for consumers. To do so would be a criminal violation of the Sherman Act. If consumers seriously dislike mandatory arbitration, financial institutions will abandon them to secure a competitive advantage
Consumers are not irrational in agreeing to them. Dispute resolution is but one among numerous equally if not more important terms or conditions in consumer finance contracts. Consumers may prefer lower interest rates or more forgiving loan repayment terms over class actions to resolve disputes.
The class action option was vastly oversold as a consumer benefit.
A 2009 study by Searle Civil Justice Institute found that consumers are nore likely to receive relief via arbitration than in class actions. The CFPB’s own study showed 87 percent of class actions yielded no relief to plaintiffs. Of the 251 class actions it reviewed, the average payment to a class member was a paltry $32.35.
In contrast, the average payment to the plaintiff’s lawyers exceeded $1 million per case. Forbes’ Daniel Fisher reported, based on researchers at Mayer Brown law firm and 2009 federal class actions, that in five of six cases where settlement distribution data was publicly available the percentage of class members who received money ranged a high of 12 percent to a low of 0.000006 percent.
In other words, the probability of a class action consumer plaintiff receiving a non-trivial monetary award is as miniscule as hitting the jackpot at Las Vegas. No one plans their life around such a contingency.
The CFPB’s repealed rule was driven by trial lawyers, not bank customers. Their concealed motto was “Millions for us, but nickels and times for our clients.” There is nothing new under the sun. That’s why Shakespeare’s Jack Cade in Henry VI, Part 2 exulted, “The first thing we do, let’s kill all the lawyers.”
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