House Committee Questions Motive Behind Arbitration Proposal

The House Subcommittee on Financial Institutions and Consumer Credit determined in a hearing on Wednesday that the CFPB’s proposed rule to ban arbitration clauses in business contracts will result in higher costs to consumers and less access to financial products.

Witnesses at the hearing included Dong Hong, VP, Regulatory Counsel, Consumer Bankers Association; Jason Scott Johnston, Henry L. and Grace Doherty Charitable Foundation Professor, University of Virginia Law School; Andrew Pincus, Partner, Mayer Brown LLP, on behalf of the U.S. Chamber of Commerce; and F. Paul Bland Jr., Executive Director, Public Justice.

The Subcommittee ultimately decided that consumers would be worse off if the ban on arbitration clauses is enacted because businesses would pass litigation costs onto consumers and divert resources away from new financial products and services.

“For example, arbitration produces a significantly higher recovery for individual consumers and has a shorter resolution timeline for recovery. In testimony before this Committee, the agency has stated that banning the use of class action waivers in arbitration agreements, the main provision in the Bureau’s rule, would achieve a primary Bureau objective—‘to give consumers their day in court.’ Nothing could be further from the truth,” said Rep. Randy Neugebauer (R-Texas), Chairman of the Subcommittee. “I fear a single, unelected bureaucrat has directed agency action that is arbitrary and capricious. The Bureau has failed to articulate a rational connection between the facts found in its May 2015 study and the agency action before us today.”

My friends on the other side of the aisle asked a trial lawyer to come speak in favor of CFPB’s Arbitration Rule. I rest my case.

— Randy Neugebauer (@RandyNeugebauer) May 18, 2016

The Subcommittee determined that a May 2015 study by the CFPB which showed more favorable outcomes for consumers who use arbitration as opposed to class action lawsuits is incomplete and ignores important information. The Subcommittee also pointed out that class action suits give little benefit to consumers while providing a windfall to trial lawyers. In the CFPB’s own study, the Subcommittee noted that 13 percent of class action lawsuits that actually benefited consumers had an average payout of just $32 while trial lawyers earn an average of $1 million per settled case—about 31,000 times the average payout.

“The CFPB’s study tried to provide that businesses do not pass on cost savings from arbitration to consumers and employees, but that attempt was unpersuasive,” Pincus said. “As the academics who reviewed the CFPB’s study concluded, the CFPB’s findings on this point were plagued by ‘theoretical problems’ and ‘technical failures,’ and they fly in the face of ‘[b]asic economic theory,’ which ‘predicts that competition forces firms to pass on to consumers [or employees] at least a portion of any cost decrease.”

Other determinations by the Subcommittee on Wednesday include: The Bureau’s own study found that consumers are more likely to obtain decisions based on the merits in arbitration as opposed to class actions, which almost always result in settlements before they can go to trial. Also, according to the CFPB’s study, arbitration is up to 12 times faster than litigation and costs about half as much.

Dong Hong, a witness at the hearing, said, “Due in part to consumers paying little to nothing for arbitration proceedings, they recover significantly higher sums than they do through class actions—$5,389 vs. $32.35 average recovery. In contrast, litigation can be complicated, time-consuming and requires a lawyer to navigate the process. In addition, many consumer claims may be too small to attract contingency fee lawyers.”

Neugebauer tweeted about the hearing on Wednesday, “My friends on the other side of the aisle asked a trial lawyer to come speak in favor of the CFPB's Arbitration Rule. I rest my case.”