Sixty-five House Democrats expressed strong support for the Consumer Financial Protection Bureau (CFPB [1])’s proposed rule to prohibit the use of forced arbitration in consumer contracts in the form of a letter [2] to CFPB Director Richard Cordray on Wednesday, according to an announcement from the House Financial Services Committee Democrats [3].
Rep. Maxine Waters (D-California), Ranking Member of the Committee of Financial Services; John Conyers, Jr. (D-Michigan), Ranking Member of the Committee on the Judiciary; and Hank Johnson (D-Georgia), Ranking Member on the Subcommittee on Regulatory Reform, Commercial and Antitrust Law, led the petition.
In May, the CFPB proposed a rule [4] that would ban class action waivers in forced arbitration agreements for financial products and services, thus paving the way for consumers to file class action lawsuits against businesses they believe have harmed them financially. The House Democrats wrote in their letter that the proposal “is a critical step to protect the public interest by ensuring that consumers receive redress for systemic unlawful conduct.”
“By restricting class actions and class-wide arbitration in consumer contracts, these clauses enable corporations to avoid public scrutiny by precluding access to the courts.”
Letter written by 65 House Democrats
“By restricting class actions and class-wide arbitration in consumer contracts, these clauses enable corporations to avoid public scrutiny by precluding access to the courts,” the letter stated. “This is particularly problematic for small, diffuse misconduct that harms innumerous consumers.” The lawmakers encouraged Cordray to proceed quickly on the rule “to ensure that consumers have equal protection under the law.”
The CFPB’s proposal to ban arbitration clauses has not been without controversy. The House Subcommittee on Financial Institutions and Consumer Credit determined in a hearing in May [5]that the CFPB’s proposed rule, if it passes, will result in higher costs to consumers and less access to financial products.
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 Bureau has failed to articulate a rational connection between the facts found in its May 2015 study and the agency action before us today.”
Rep. Randy Neugebauer (R-Texas)
“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.”
Click here [2] to read the House Democrats’ letter.