The ‘consumer’ financial bureau chooses lawyers over consumers

With a name like the Consumer Financial Protection Bureau, you would think the CFPB would always put consumers first. And yet, in its latest bombshell, the bureau chose to give a regulatory windfall to trial lawyers at consumers’ expense.

In a sweeping rulemaking that rejected all attempts to find middle ground and that will affect hundreds of millions of contracts, the CFPB has in effect banned arbitration as a means of settling disputes. Instead, the bureau is promoting the use of class action lawsuits — a strategy that will severely limit legal options for consumers — while guaranteeing huge fees for trial lawyers.

{mosads}Let’s step back. Arbitration is an independent, neutral legal process that two parties to a contract — say, a customer opening a checking account at a bank or credit union — can agree to in the rare case they have a dispute that’s not resolved immediately between the financial institution and the customer. It’s more convenient, cheaper and faster than filing a lawsuit.

The leader of the CFPB, along with plaintiffs’ lawyers, like to conjure up scenes from John Grisham novels with plucky underdogs and noble attorneys, imagining that mandatory arbitration clauses prevent citizens from having “their day in court.” The reality of class action litigation is not so picture-perfect. Instead, class actions are attorney fee machines, designed to win million-dollar legal fees while consumers get a pittance.

Consider a few notorious examples. In 2010, a class action settlement over reported hybrid gas mileage was reached with Honda in which the lawyers got nearly $3 million in fees, while the plaintiffs received only coupons for Honda products. (This egregious settlement was later overturned by a judge.) In 2011, an antitrust case against Sirius XM radio was settled with zero-cash-value “injunctive relief” for plaintiffs — but a $13 million payday for the attorneys.

The irony is that arbitration provides vastly better outcomes for consumers. The CFPB’s own 2015 study of arbitration and class action outcomes in disputes over financial products showed that in cases where arbitrators found for consumers and granted an award, the average award was $5,389.

Contrast this to what consumers won in class action settlements. In 87 percent of cases, consumers received nothing. Those who received cash payments won on average just $32.35. And many of those settlement-eligible individuals received nothing at all — in fact, 96 percent of class members failed to submit forms when required. But attorneys certainly received their payout. In the class actions studied, lawyers’ fees amounted to $424 million.

Bottom line: Consumers who prevail in arbitration win 166 times what those who prevail in class actions do. And they get faster relief too — a matter of months, not years. If arbitration goes away, consumers with claims that are too individualized to be bundled into a class will have no choice but to hire a lawyer or attempt to navigate our overcrowded legal system on their own.

It’s also important to remember that disputes represent a tiny fraction of all customer relationships. The vast majority of customers have no complaints at all. In 2016, for example, credit card accounts had a 0.006 percent complaint rate.

When banks and credit unions include arbitration clauses in their contracts, it’s because such clauses are the most pragmatic path, producing the best outcome for all. As the CFPB itself has found, it’s faster, cheaper and avoids all the downsides of protracted litigation. When customers are in the right, arbitration gets recompense into their pockets as quickly as possible.

The Consumer Financial Protection Bureau chose trial lawyers over consumers. We think that there is a better deal for our customers. Congress now has fewer than 60 working days to undo this anti-consumer action, and I urge leaders on Capitol Hill to act quickly.

Rob Nichols is president and CEO of the American Bankers Association.

The views expressed by contributors are their own and are not the views of The Hill.