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Cotton Discusses CFPB's Anti-Arbitration Rule in U.S. Chamber of Commerce Speech

July 20, 2017

Contact: Caroline Rabbitt (202) 224-2353

Thank you all very much for the warm welcome, I appreciate it. Thanks to the Chamber for hosting me this morning. It's always a delight to be here. I was especially pleased when I got the invitation to talk about the proposed topic because I know, like many of you, I was just as displeased whenever I saw the CFPB announced last week that it would be finalizing its anti-arbitration rule. I know you're devoting a full two hours today to a thorough analysis of the rule and its implications-all 700 some-odd pages. Very exciting. I don't understand why you don't do that on a Friday night. But I tend to take a pretty simple view of these things, and I would simply suggest that that rule should be repealed. The Congress should act to repeal it using the Congressional Review Act, and the broader implications are, is that we should recognize that this is a reason why we need to finally rein in the Consumer Finance Protection Bureau.

Now, I know the rule has its supporters, and, of course, they say they have their good reasons-you know, people don't read the fine print. They don't have time to go through arbitration. They're getting ripped off by big companies. You listen to the CFPB, and the way they tell it, they're just defending the little guy-the poor, helpless, class-action lawyer. I don't want to criticize the lawyers. I know we have some in the audience here, and plus it's just too easy. I do, though, want to criticize an excessively litigious legal system, and I especially want to criticize this rule that makes it more prone to frivolous lawsuits, more expensive for businesses, and more unfair to your average consumer.

Because if you look at the evidence, arbitration is good for the real little guy. In fact, the CFPB actually did a study on this very topic in 2015, as mandated by the Dodd-Frank Act. And its own study-its own study-found that arbitration is not only faster than class-action lawsuits, but results in bigger awards for people who use it. Now, class-action lawsuits might get bigger press; they might get bigger settlements-but it's usually the lawyers that get the lion's share of those settlements. I think here of the class-action lawsuit, for example, brought against Blockbuster in 2001: The lawyers got millions. And the customers got a few free coupons in the mail.

And yet, if this anti-arbitration rule stays in place, fewer people will be able to use arbitration. Companies won't pay for the process, of course, if they'll also be subject to litigation or to class-action arbitration matters. It defeats the whole purpose of the arbitration process.

And those are just the costs you can measure. There are also the hidden costs to consider. It's not very often I find myself in agreement with Justice Ruth Bader Ginsberg. But in 2010, she wrote that class-action lawsuits create "pressure to settle even unmeritorious claims" because of the "potentially ruinous liability." This is just a fancy way of saying what you already know: Fighting is often more expensive than settling, no matter how unreasonable a claim may be. And every dollar that financial institutions spend on settlements in class-action lawsuits is a dollar they're not lending out to small businesses, families, and the American worker.

So if this arbitration rule doesn't help consumers and if it hurts the economy, then you have to ask yourself, why do we have it? Well, that's a question that Congress is asking itself right now, and I'm working with my colleagues to repeal it. We're going to try to use a law called the Congressional Review Act. It allows Congress to overturn-with a simple, majority vote-under expedited timelines-any regulation issued by a federal agency in the first 60 days after it's been submitted to Congress. The Congressional Review Act became law in the 1990s, but its use was pretty rare until this year. It had only been used one time, in 2001, to overturn the Clinton administration's midnight ergonomics regulation. That's because a president would typically defend the regulations of his own administrative agencies. And that's why it's most common in the early days of a new administration. Since President Trump came into office, Congress has used it 14 times to repeal midnight Obama regulations.

And that's our plan now: I'm working with Chairman Crapo on the Banking Committee to get the 50 votes we need to overturn the rule. We have 60 days to get this done. I hope, though, that we can complete it before the August recess, and I expect that the House of Representatives will do its part next week.

But even if we're successful in overturning the arbitration rule, we still won't have addressed the root problem. Because the real problem is not a single rule, it's not a particular regulation, it is the agency that issued it. It's the CFPB. The agency is designed to run amok. That's why you have the bizarre situation of an agency issuing a regulation with which the elected executive of our country disagrees.

Just look at its structure. First, it has only one director, and he can only be fired for "cause." If you look at other regulatory commissions, regulatory commissions in the financial space like the SEC or the CFTC, there are multiple members who have to earn a majority of their colleagues to issue regulations. And even when there's a solid one-party majority in those commissions, there's at least a minority with the resources, the staff, and the platform to criticize the decision in dissent. In fact, when Congress was first considering the structure of the CFPB under the Dodd-Frank Act, many prominent Democrats supported a commission-like structure: Senators Dick Durbin, Bernie Sanders, and Chuck Schumer are among them. At the CFPB today, what Richard Cordray says, is what goes, because there are no other commissioners to dissent from his views. And to this day, to this very day, almost six months into the Trump administration, there's not a single Trump appointee at the agency. And the Trump transition team's plans for the agency are simply gathering dust on a shelf somewhere.

Second, the CFPB has an unlimited jurisdiction. The Dodd-Frank law gave the CFPB authority to regulate any practice it considers either "abusive" or "unfair" with no definition of those terms. It even purported to prohibit the CFPB from regulating certain industries like automobile dealers, which somehow the CFPB has managed to do anyway. And tell me if you know a single government official who takes a narrow or a cramped view of his jurisdiction and authority, particularly when it is defined in terms like "unfair" or "abusive." The Founders, by contrast, understood that even though the Constitution specifically enumerated the powers that Congress would have, that would be a mere parchment barrier without the separation of powers and the checks and balances, without a president and an independent court system to hold Congress in check. As James Madison said, "Ambition must be made to counteract ambition." There's no one to counteract the ambition of the CFPB director.

Finally, and most outrageously, follow the money. The CFPB does not get its money from Congress, unlike virtually every other agency in our government. It's not subject to the annual budgeting process like most of those agencies. By design, it gets its funding directly from the Federal Reserve.

Not only that, but the CFPB director gets to tell the Federal Reserve how much money he wants to draw. No matter how many ill-advised rules the agency writes, no matter how intrusive or expensive their actions prove to be, Congress can never exercise its oversight power through the control of the CFPB's budget. The power of the purse for this agency is simply absent.

Unlimited money, plus unlimited jurisdiction, minus any form of accountability-you don't have to be the parent of a teenager to know that equation equals trouble. And here we have a federal agency, with 228 employees making more than $200,000 a year, doing the one thing that government seems to do best for itself, whether it's a local government or an international organization: building a beautiful, brilliant, expansive new headquarters. And all the while passing rules that badly handicap American workers and businesses with no accountability whatsoever. And it's precisely for that reason that, just last fall, the D.C. circuit court of appeals ruled the CFPB to be unconstitutional.

Judge Brett Kavanaugh, a judge on that court, wrote, "other than the President, the Director of the CFPB is the single most powerful official in the entire United States Government, at least when measured in terms of unilateral power." It's hard to imagine a worse constitutional monstrosity, and that's why we've got to change the CFPB.

Now it's a proper and important role of government to police consumer fraud, and I could see the need for an agency that would provide a kind of one-stop shop for consumers where they could report abuse, fraud, harassment, and other bad behavior. We should make it easier for consumers to get relief from scam artists and fraudsters. As President Reagan liked to say, the "free enterprise system is not a hunting license."

But ultimately, as you all know, the real solution is competition. Competition in a fairly regulated market is the best environment for consumer choice and consumer protection. The solution to Blockbuster Video's expensive late fees was not the CFPB, and really not a class-action lawsuit, but rather Netflix. For those youngsters in the audience, Blockbuster was a place where you went and rented a move at, and took home, and put in something called a VHS player. Be that as it may, there's no sign the CFPB truly understands that competition, new entrants into the market, even entirely new products and services in the market is the solution. And instead it just keeps putting protections in place for consumers that cost more than they benefit those consumers, and putting obstacles in the way of economic growth. That's what we should really be focused on because so many of our problems would get so much easier to solve if we had 3 percent economic growth, which we have averaged for the first 60 years after World War II. And to do that, we need every oar of policy in the water, rowing in the same direction: fiscal policy, regulatory policy, monetary policy. What we don't need is the CFPB punching holes in the bottom of our economic boat.

That's why I'm going to do all I can to repeal this regulation in the next three weeks of the congressional session, and failing that, when we return in September. That's why I am going to continue to fight to reform the CFPB. I know we're going to need the help of everybody in this room to do just that. The clock is starting now. There's no reason, in my opinion, this couldn't be a bipartisan effort. At least a few Democrats recognize the need to reverse this rule and return the CFPB to its proper constitutional oversight under the Congress. So let's get the word out, let's overturn this rule, and let's reform the CFPB. Thank you all very much.