On October 23, the U.S. Department of the Treasury released a report objecting to the Consumer Financial Protection Bureau’s arbitration rule.  As we previously reported, the rule prevents class action waivers in arbitration provisions for covered entities and also requires covered entities to provide information to the Bureau regarding any efforts to compel arbitration.  The Treasury’s report, entitled “Limiting Consumer Choice, Expanding Costly Litigation: An Analysis of the CFPB Arbitration Rule,” concludes that the arbitration rule “will generate massive economic costs—borne by businesses and consumers alike—that dwarf the speculative benefits of the Bureau’s theorized increase in compliance.”

First and foremost, the Treasury took issue with the Bureau’s arbitration study, calling it “limited” and arguing that the data the CFPB considered raised questions about the Bureau’s conclusions and, ultimately, undermined the rule’s foundation.  The Treasury called into question the CFPB’s evaluation of data, contending that the Bureau failed to consider properly whether banning arbitration clauses would further consumer protection issues or favor the public interest.

The Treasury report challenges the arbitration rule in specific areas and reached seven conclusions:

  • The Rule will impose extraordinary costs.  The report argues that the CFPB’s estimates of increased litigation accounted for only federal litigation, rather than federal and state litigation.  According to the Treasury Department, these increased costs will be passed along to consumers, likely in the form of higher borrowing costs for credit card users.
  • Most class actions do not benefit putative class members.  The Treasury contends that the overwhelming majority of class action lawsuits do not provide any meaningful relief for class members and, according to the Bureau’s own projections, four in five class actions will yield no recovery at all for putative class members.
  • In those class cases that offer class-wide relief, class members are not interested in obtaining relief.  Class members typically demonstrate very little interest in class settlement funds.  On average, only 4% of class members actually claim relief and most settlements only offer class members $32.35 per person.
  • Plaintiffs’ attorneys will benefit greatly from the rule.  While class members only receive an average of $32.35 each for class settlements, plaintiffs’ attorneys collect more than $1 million.  The Bureau’s own data indicates that class plaintiffs’ counsel will collect an additional $330 million over the next five years as a result of the rule.
  • The CFPB did not consider whether improved disclosures would serve the public better than a wholesale ban on arbitration.  According to the Treasury Department, the Bureau failed to consider whether enhanced disclosure of arbitration clauses would achieve the same results as banning arbitration entirely.
  • The Bureau did not consider the number of class actions that are meritless.  The report maintains that the CFPB did not take into account the number of meritless class action cases that are settled.
  • The CFPB improperly assumed that the Rule will increase compliance with consumer protection laws.  According to the report, the Bureau has not identified any evidence indicating that firms that do not use arbitration clauses have a better consumer protection record or comply with the law at a higher rate.  As a result, it is improper to assume that banning arbitration will bring companies closer in line with consumer protection statutes.

With all of these limitations in mind, the Treasury argues that the arbitration rule “does not satisfy the statutory prerequisites for banning the use of arbitration agreements under the Dodd-Frank Act.”  Instead, the Treasury maintains that the rule stands on faulty reasoning and will only serve to increase costs without any net benefit to consumers.

Republican members of Congress have worked to repeal the rule through the Congressional Review Act.  Members of the House of Representatives passed a resolution to invalidate the rule ten days after it was issued.  The measure then moved to the Senate, which has only a few legislative days left to act.

Troutman Sanders will continue to monitor these regulatory developments and any related litigation that arises out of the arbitration rule.