The Consumer Financial Protection Bureau's proposal to limit the use of arbitration clauses came under attack Wednesday for potentially raising costs and liability for financial firms.
The CFPB's plan, released earlier this month, would ban the use of arbitration clauses that prevent consumers from bringing class-action lawsuits.
But industry advocates and outside observers sharply questioned the proposal during a House Financial Services subcommittee hearing on Wednesday, arguing it would help plaintiff's lawyers more than consumers.
"We're running the system just to transfer money from defendants to class action lawyers," said Jason Johnston, a professor at the University of Virginia School of Law.
Andrew Pincus, a partner at Mayer Brown and a former assistant to the solicitor general in the Justice Department, said the cost to companies of defending class action lawsuits would raise the price of lending.
"If reserves have to be taken because of massive class actions that's obviously capital that would not be available to support lending," Pincus said. "The problem here is arbitration is being ended and what the bureau didn't study is [whether] there is a way to make arbitration more user-friendly than it is."
Pincus suggested that if an institution harms many consumers, the CFPB could use its own power to redress the problem.
"The CFPB's study didn't take into account the bureau's own enforcement authority, and link it to claims that might be better remedied on a broader basis," he said.
The Dodd-Frank Act gave the CFPB authority to study arbitration agreements and to prohibit or restrict their use if the bureau finds it is in the public interest and for the protection of consumers.
But Johnston argued that the CFPB's study, which found arbitration clauses limited consumers' options, was flawed. "The bureau never addressed the key policy question, which is, will consumers be better off" in a class-action lawsuit? he said.
Several lawmakers agreed.
"It's bad for business, it's bad for consumers and it's bad for mainstream America," said Rep. Roger Williams, R-Texas.
The proposal would impact credit cards, checking and deposit accounts, certain auto loans, money transfer services, prepaid cards, small dollar or payday loans, and installment loans.
Rep. Blaine Luetkemeyer, R-Mo., said the plan would have the unintended consequence of limiting consumers from redress for individual claims.
"If you have a financial institution that took advantage of an individual, and if there are no other alternatives and you can't bring a class action suit, then we've really restricted the ability of the average consumer to be able to have an opportunity to be righted," he said.
Rep. Brad Sherman, D-Calif., said the choice should not be between arbitration and litigation. He argued that under the current system — without the CFPB's plan — consumers who suffer small-dollar harm have nowhere to turn.
"The choice is between arbitration and no remedy," Sherman said. "If we create a circumstance in which everyone in the financial services industry knows that if there is a harm of $10, there is absolutely no remedy, some businesses will change their business model, and if they take $10 to $15 away, it benefits their bottom line."