WASHINGTON — The U.S. Chamber of Commerce along with 13 other business associations and five financial trade associations filed a lawsuit Friday against the Consumer Financial Protection Bureau, arguing that its rule banning mandatory arbitration agreements harms consumers.
“Arbitration gives consumers the ability to bring claims that they could not realistically assert in court, including the small and individualized claims that they care the most about,” the lawsuit said.
The CFPB finalized the arbitration rule in July and the financial services industry had hoped that Republican lawmakers would be able to reject the rule using a procedure called the Congressional Review Act, which gives Congress 60 session days to roll back an agency rule with a simple majority.
The House easily passed a measure nullifying the CFPB’s rule in July, but the Senate has yet to act and with a narrow Republican majority, it is unclear if it will be able to gather the votes before the statutory deadline expires.
Without certainty that Congress will eventually be able to reject the rule, the lawsuit serves as an alternative means to fight it.
The industry lawsuit argues that the CFPB didn’t follow its own cost-benefit analysis and finalized the rule despite conducting a study that found outlawing arbitration clauses in financial contracts may actually hurt consumers.
“The bureau ignored the data before it that demonstrated both the benefits of arbitration to consumers and the failure of class-action lawsuits to provide consumers with meaningful benefits, while also failing to consider the large volume of additional data that confirms both of those points,” the lawsuit said.
The lawsuit argues that the final rule was flawed, pointing to the study that concluded that the arbitration process is quicker and pays out more in relief than class action lawsuits.
“The CFPB’s anti-arbitration rule would produce class action lawsuits that will take years to be heard, clog the courts, and result in comparatively small payouts for consumers,” said Chris Stinebert, president and chief executive of the American Financial Services Association.
Consumer groups, on the other hand, have said the disparity in payouts exists only because existing mandatory arbitration agreements prevent more class action lawsuits form being filed.
The filing came a day after Keith Noreika, acting director of the Office of the Comptroller of the Currency, told an audience in Philadelphia that his agency also concluded the final arbitration rule will hurt consumers after it analyzed data from the CFPB.
“There could be as high as a 3.5% annual percentage rate increase for these consumers who would be subject to the rule,” Noreika said. “That’s like a 25% increase in credit cost for people who may live week to week.”
The OCC’s study, released publicly on Thursday, found that credit card costs would increase by an expected 3.43%.
“That gives real concerns not only with respect to the potential safety-and-soundness impact that that rule may have on banks,” Noreika said, “but there also is a real tangible economic effect that this may have on consumers, especially those who live week to week."
Consumer groups quickly fired back against the lawsuit.
“The idea that the Chamber and big banking interests would take the CFPB to court to stop consumers from going to court when they’re screwed over by big banks, reeks of desperate hypocrisy,” said Karl Frisch, executive director of Allied Progress. “The study in question clearly shows class action suits benefit consumers more than forced arbitration. On average, only 400 consumers per year pursue arbitration claims, and only 16 receive any cash relief — totaling only $86,216. In contrast, 34 million consumers recover $366 million more in class action lawsuits per year."
Industry sources said that the CFPB likely anticipated the lawsuit and carefully documented its own cost-benefit analysis when writing the rule, which could make the case more difficult for the industry.
The lawsuit also challenges the constitutionality of the CFPB’s structure as an independent agency with a single director. A similar case is being heard in U.S. Court of Appeals for the D.C. Circuit in case that the PHH mortgage brought against the bureau.
“The Arbitration Rule, which is the result of this flawed regime, therefore must be vacated and the matter remanded for consideration by an agency constituted in compliance with the Constitution,” the lawsuit says.
The lawsuit was filed by the: U.S. Chamber of Commerce, American Bankers Association, American Financial Services Association, Consumer Bankers Association, Financial Services Roundtable, Texas Association of Business, Texas Bankers Association, Bay City Chamber of Commerce, Grand Prairie Chamber of Commerce, Grapevine Chamber of Commerce, Greater New Braunfels Chamber of Commerce, Greater Irving Las Colinas Chamber of Commerce, Longview Chamber of Commerce, Lubbock Chamber of Commerce, McAllen Chamber of Commerce, North San Antonio Chamber of Commerce, Paris-Lamar Chamber of Commerce, and Port Arthur Chamber of Commerce.