House Republicans are holding a hearing Wednesday afternoon in their desperate search to undercut the entity that was created by Dodd-Frank to protect consumers from lenders: The Consumer Financial Protection Bureau (CFPB). At issue is the CFPB’s proposed regulation change that would prohibit financial institutions—including banks, credit card companies, payday lenders, and mortgage companies—from adding an arbitration clause to their contracts that prevents consumers from going to court as part of class action lawsuits.
Why the change? Because consumers acting as single agents are generally unlikely to discover they’ve been cheated by a financial institution and, even if they do, their likelihood of pursuing a remedy on their own through arbitration is also greatly diminished. In other words, forced arbitration makes it super easy for financial institutions to scam customers with little to no downside.
Republicans, naturally, are painting elimination of the clause as a “big wet kiss” to trial lawyers. And in the lead up to the House Financial Services Committee meeting, the Wall Street Journal has charged that the government is forcing a regulation change that consumers haven’t even asked for.
The government’s own research shows that consumers aren’t demanding this new regulatory assault on U.S. markets.
Goodness, an “assault!” Can’t imagine why people aren’t widely clamoring to change a fine-print clause that mostly goes undetected by consumers—until they have cause to try to use it.
Anyway, Republicans are digging and prior to Wednesday’s meeting they reportedly asked that the CFPB turn over all communications the agency had with Public Justice, a consumer advocacy group. The clear hope is that the interactions will reveal the evil plot between CFPB officials and advocates to come up with a rule that would be a windfall for trial attorneys (heh, heh, heh). As it turns out, the CFBP actually met with financial services representatives at least 130 times, so they had plenty of input regarding the new rule.
For the hearing, Republicans picked three witnesses representing banking, the U.S. Chamber of Commerce, and law firms working to defend banks and lenders. The sole Democratic witness at Wednesday afternoon’s hearing is the executive director of Public Justice, Paul Bland. So I called him up to ask what’s most important about the hearing. Here are three takeaways.
1. Arbitration sucks for consumers
The reason banking institutions (and by extension, Republicans) are in a tizzy over the rule is because arbitration works grandly in their favor.
In fact, the CFPB undertook an exhaustive multi-year study of whether arbitration clauses were disadvantaging the public and found that, in the entire United States for all lenders of all financial products, only an average of 411 cases were filed by consumers with the American Arbitration Association during each of three years it studied. From the report:
Of the 341 cases filed in 2010 and 2011 that were resolved by an arbitrator and where we were able to ascertain the outcome, consumers obtained relief regarding their affirmative claims in 32 disputes. Consumers obtained debt forbearance in 46 cases (in five of which the consumers also obtained affirmative relief). The total amount of affirmative relief awarded was $172,433 and total debt forbearance was $189,107.
By contrast, the CFPB examined class action lawsuits that were filed in 419 settlements between 2008 to 2012 and found that 13 million consumers received $2.7 billion in recoveries, refunds, or relief.
2. The CFPB met with financial institutions for input at least 130 times
Even though Republicans were hot to track down all communications between the CFPB and Public Justice, Bland only recalls one meeting he attended between CFPB head Richard Cordray and consumer advocates.
“I met him at a couple of public hearings,” recalls Bland, “but I’m not sure that I met him more than once at a small gathering of consumer groups.” Ah-ha!
Anyway, the real meetings to pay attention to here are the ones in which Cordray met with representatives—mostly CEOs and CFOs—of financial institutions: 130 of them in the period between January 2012 and October 2015, according to a review by the American Association for Justice.
“It’s remarkable how these guys are complaining that they don’t have enough access and the facts are so completely to the contrary,” Bland says.
3. Forced arbitration is a Scalia legacy just begging to be reversed
“Scalia was relentlessly hostile to consumers and workers and class actions,” Bland says. “And he was exceptionally favorable towards forced arbitration in every respect.”
Before Justice Scalia had his way in several 5-4 decisions he authored for the high court’s majority, if you could prove that an arbitration clause would undermine a civil rights statute or a consumer protection law, then general rules of contract law would make the contract unenforceable.
But in 2011’s AT&T Mobility v. Concepcion ruling, the Supreme Court created an exception to that rule, saying that arbitration clauses should be enforced even where that’s true.
Bland believes that if Scalia is replaced by a progressive justice, some of his arbitration rulings will be overturned.
In fact, Justice Ginsberg has compared the decisions to a body of law from the early 1900s, known as the Lochner era, that lawyers generally view as a period of misguided activism by the high court. For example, child labor laws were struck down because who says an eight-year-old doesn’t have utility? Here’s Ginsberg, just weeks before Scalia passed earlier this year:
I was reminded of Lochner reading some decisions of the Court concerning workers, consumers, credit card holders who signed agreements saying “if you have a dispute with us, you can bring it only in arbitration — not in court — and you cannot use the class action device. You must sue for your individual claim, which might be 30 dollars, and that’s it.”
Bland agrees with the vulnerability of those decisions. “If you have a progressive justice, there’s a significant chance a lot of the worst decisions could be overturned,” he says. But Bland adds that no one really knows where Obama nominee Merrick Garland stands on these issues.
