CFPB Anti-Arbitration Rule Will Harm Consumers and FinTech

That’s what the Consumer Financial Protection Bureau (CFPB) claims binding arbitration clauses in consumer finance contracts often amount to. In these clauses, consumers agree to waive their rights to sue either as individually or in class actions, as both consumers and businesses agree to be bound by the rulings of an arbitration panel in the event of a dispute.

In justifying his bureau’s proposed rule to ban such clauses, CFPB Director Richard Cordray calls binding arbitration a “contract gotcha that effectively denies groups of consumers the right to seek justice and relief for wrongdoing.” But the real “gotcha” fleecing consumers comes from class-action attorneys who walk away with the vast bulk of multi-million dollar settlements, while consumers get little more than a product voucher or coupon.

Now the CFPB wants to push consumers into class-action lawsuits instead of arbitration, despite data from the CFPB’s own study showing that arbitration more often results in better outcomes for consumers. As my Competitive Enterprise Institute colleague Iain Murray and I note in our comments urging the CFPB to pull the regulation it has proposed: “The evidence is clear: arbitration more often compensates consumers for damages faster and grant them larger awards than do class action lawsuits.”

Arbitration as a method to resolve disputes actually predates the class-action lawsuit by centuries. Some form of arbitration, or private dispute resolution, occurred in all nations before courts and civil trials were even created. George Washington, who passed away in 1799, inserted an arbitration clause into his will that provided for disputes to be resolved by “three impartial and intelligent men,” whose decisions would be “as binding on the Parties as if it had been given in the Supreme Court of the United States.”

As commerce and technology developed, individual lawsuits in most instances in which consumers suffered common damages became expensive and impractical. Yet at the same time the arbitration process modernized in the early 20^th century to settle commercial disputes, courts authorized class action lawsuits in which plaintiffs with similar grievances could be represented by one group of attorneys. In the 1960s, courts began allowing lawyers to add consumers to class actions unless the latter opted out, which is the current practice to this day.

The five decades when arbitration and class actions have operated alongside one another demonstrates that consumers often get better and faster results with arbitration than with class actions. My colleague Ted Frank, who has successfully challenged several class actions that favor attorneys at the expense of consumers, points out that 80 percent of class actions filed are never certified by the courts, either because they are withdrawn or lawyers cannot meet the burden of proof showing common injuries to multiple plaintiffs. And of those that do go through, the average class action takes more than three years to move to settlement for the consumer. In contrast, the Searle Center for Civil Justice found that the average time from an arbitration filing to a final consumer award is 6.9 months.

Class actions also frequently act as a wealth transfer from consumers to well-heeled attorneys. Many courts allow attorneys to keep over 90 percent of settlement proceeds, while others fail to stipulate for class members to receive any benefit. Indeed, data from the CFPB study’s own survey of more than 400 class actions against financial firms show that the average payout among all class members is $1.45 per person.

Source: www.forbes.com