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Cotton and Rothfus Op-Ed in Forbes: ‘Repeal the CFPB's Anti-Consumer Ban on Mandatory Arbitration Clauses’

July 25, 2017

Repeal the CFPB's Anti-Consumer Ban on Mandatory Arbitration Clauses
Senator Tom Cotton and Representative Keith Rothfus
Forbes

Last week, the Consumer Financial Protection Bureau (CFPB) issued a rule prohibiting banks, credit-card companies, and other financial institutions from including mandatory arbitration clauses in new contracts. The CFPB claims to have struck a blow for consumer rights, but the truth is, this rule will be a boon to frivolous lawsuits-and a drag on our economy.

Today, when you get a new credit card or open a savings account, you likely sign a contract stipulating that, should a dispute arise between you and the company, you both agree to submit it to an independent third party known as an arbitrator. Arbitration is 12 times faster than litigation, according to a study by the CFPB itself-and, on average, it results in bigger awards for the people who bring disputes.

Despite all this, the CFPB maintains that arbitration is too time-consuming, too expensive, and too tilted toward big companies, who pay for the process after all. It argues class-action lawsuits are the proper vehicle for consumer justice. So under this new rule, companies will be prohibited from including mandatory arbitration clauses in new contracts, which prevent consumers from filing class-action lawsuits. The rule also requires companies that maintain contracts with arbitration clauses to submit to the CFPB detailed information regarding claims, awards, and other related materials.

In other words, firms will have to suit up for the oncoming financial assault of far more class-action lawsuits. There are already about 15 million class-action lawsuits filed each year. But just 13% of them actually result in a benefit to consumers-and the average payout is roughly $32. Plaintiff lawyers, meanwhile, earn an average of $1 million per settled case. In other words, trial lawyers walk away with millions, while consumers are stuck paying new fees to cover the costs. And companies aren't going to pay for arbitration if they're also open to class-action lawsuits; it defeats the whole purpose. So consumers will lose out on a superior option.

The Office of the Comptroller of the Currency (OCC) has itself expressed legitimate concerns about the inevitable fallout. The OCC predicts the increased cost of litigation resulting from the rule could harm the safety and soundness of the federal banking system. In addition, community banks, which are already under considerable pressure, would have to hold greater reserves to prepare for future litigation. And every dollar community banks set aside to pay for future settlements is a dollar they're not lending out to small businesses or families.

Fortunately, there is a solution. We've introduced legislation in both chambers of Congress to repeal the rule by using the Congressional Review Act, which the House will be voting on today. Under the CRA, Congress can undo a rule issued by a federal agency if it passes a resolution repealing it within the first 60 days after the rule is entered into the Federal Register. Just this year, Congress has used the CRA to repeal 14 of the Obama administration's midnight regulations, and we'll be happy to make this one the 15th.

Of course, this kind of heavy-handed power grab is precisely the type of abuse one might expect from an agency as reckless as the CFPB. The D.C. Circuit Court of Appeals has ruled that the CFPB, as currently designed, is unconstitutional. The court notes that "other than the President, the Director of the CFPB is the single most powerful official in the entire United States Government." So, if anything, this rule is yet more evidence that Congress should rein in this rogue agency.

We stand ready to make that happen, but the first step is repealing this anti-business, anti-consumer, anti-commonsense rule.