The recently approved arbitration rule from the Consumer Financial Protection Bureau (CFPB) disproportionately favor the interests of trial lawyers over those of consumers and the financial institutions from which serve them. Congress can and needs to immediately overturn this draconian new rule. The CFPB, an agency almost unaccountable to Congress, was created under Dodd-Frank, and given almost unlimited authority to regulate the financial services industries.
The new CFPB rule is an example of the clear difference in visions on how government should regulate providers of services, including financial services. In this instance, the CFPB handed down a rule prohibiting arbitration clauses in contracts between financial institutions and consumers, such as loan agreements. Arguing that arbitration clauses deny consumers “their day in court” in disputes with financial institutions, the new CFPB rule prohibits mandatory arbitration terms in contracts such as loan agreements.
Sen. Tom Cotton (R-AR) announced opposition to the CFPB rule and that he and other Senators will work to repeal it next week. “If you look at the evidence, arbitration is good for the real little guy,” MarketWatch.com quoted Sen. Cotton as saying. He also noted that arbitration is faster than court processing of class actions and it generally results in larger rewards to consumers, according to a 2105 CFPB study he cited. Senators have 60 days to repeal the rule since it was published in the Federal Register Wednesday of this week. Cotton also stated he will continue to push for reforming the CFPB itself.
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The rule was released by the CFPB’s Director, Richard Cordray, who is a lawyer himself, and is activist liberal Democrat who served in the Ohio House of Representatives, ran for Congress as a Democrats, and was appointed to head up the CFPB by President Barack Obama. Cordray, like most liberals, believes consumers should have extensive rights to file lawsuits. Trial lawyers are the chief beneficiary of a legal systems where consumer lawsuits are encouraged over arbitration between financial institutions and consumers.
The numerous calls for legal reform in recent years help to highlight the degree to which lawsuits, especially class actions, have been rampantly abused. Trial lawyers, far more than plaintiffs, stand to enrich themselves greatly from class actions. For this reason, the use of arbitration in disputes has been an alternative to the costly abuse of lawsuits.
Trial lawyers love class actions because they are generally the big winners. The attorneys are fully paid well regardless of how many members of the represented class claim their share of the compensation won in the class action. For instance, the recent class action settlement involving the Ford Explorer SUV paid the attorney representing the plaintiffs a total of $25 million while the plaintiffs who claimed their share were collectively paid a total of $74,000.
Even worse, a recent class action of Rice Krispies cereal netted the attorneys $1.2 million in legal fees while consumers were awarded five dollars each from the settlement. Class actions are a racket that heavily benefit trial lawyers at the expense of all other parties involved. Stopping arbitration in favor of enabling more class actions hardly brings about any benefit to consumers.
This new rule is another instance of this rogue agency, the CFPB, creating bad policy that is clearly not in the public interest. Congress need to reform this out-of-control agency, and follow the lead of Sen. Cotton in doing this.
Prohibiting arbitration as an option for financial institutions and their customers will likely make it more costly for disputes between them to be settled, at less gain to consumers. It is clear this new rule very much favor trial lawyers at the expense of consumers, and Congress needs to act quickly, long before those 60 days are expired, and vote to repeal this rule. Congress was elected to represent the American people, and that means, in this instance, repealing this draconian anti-consumer, anti-arbitration rule from the CFPB.