The Consumer Financial Protection Bureau (CFPB) hit a new low this month when they proposed a new rule that directly harms those that the CFPB was created to protect: the consumers. The proposed regulation would place severe restrictions on the use of arbitration in settling disputes, forcing consumer suits out of arbitration and into class action litigation. The studies and arguments the CFPB attempted to use in the proposal indicate that the CFPB is aware that it is harming consumers while padding the pockets of class action attorneys.
The CFPB’s 377-page proposal is not a comprehensive evaluation nor is it a necessary explanation of the regulation. The proposal is more like the world’s longest law journal article, and the article is often sidetracks in order to redefine terms, list all the entities subject to the regulation, and to present analyses that are outright deceptive.
While this might sound hard to understand, it is actually pretty simple. Learning about this regulation definitely doesn’t require falling down the CFPB’s regulatory rabbit hole.
The first apparent problem with this regulation is that it removes a process with significantly favorable consumer results. This is the process of arbitration. Arbitration is far less time-consuming and drastically less expensive than the class action suits.
Additionally, consumers who settle disputes through arbitration receive, on average, 166 times the amount they would have received through a class action suit. Even in a successful class-action suit, the lawyers receive the vast majority of the settlement and the consumers receive little to nothing.
Some may find this description of a disappearing arbitration process to be problematic. Technically, the CFPB’s proposal does not outright prohibit all uses of arbitration.
However, the language used by the CFPB in this regulation is far less drastic than its application. One of the more drastic consequences would be the creation of a de facto ban on the use of arbitration by companies.
The arbitration ban would come as a result of the shifting costs in legal spending. Following the enactment of this regulation, companies start spending huge amounts of money defending against class action suits. The cost-benefit of arbitration would change and companies would eventually abandon the entire process.
If the arbitration process were to be entirely eradicated, the consumers would suffer the most. Businesses would also suffer, as the use of the arbitration process protects them against abuses of the class action system. Small businesses would suffer more as they would be devastated by a disproportionate negative impact from class action suits.
It seems that everyone would suffer from the anti-arbitration rule. There is one group, however, that would actually benefit from this regulation: the class action lawyers.
When consumers win a class action suit, their lawyers also win. Yet, when consumers lose a class action suit, their lawyers still win.
The defense lawyers win every single time and they get paid in every single case.
Even when a class-action suit is successful, the comparison between the lawyer and consumer pay is astounding. In these cases, the lawyers receive a vast majority of the settlement. It is not uncommon for lawyers to receive millions while consumers receive very little or sometimes nothing at all.
The CFPB is telling consumers that the best protection they can get is through a very expensive game with odds of twenty-million-to-one.
Next: In the second part of this series, we will take a look at how the CFPB misled consumers and expanded regulatory reach while conducting a Dodd-Frank mandated study that padded the pockets of class action lawyers with $425 million.
The third installment in our series will discuss the larger implications of the CFPB’s lack of accountability to Congress, its independence from the Executive branch, and its recent attempts to overturn court rulings by way of regulation.