Treasury Report Slams Potential Impact of CFPB Arbitration Rule

Only a few weeks after Acting Comptroller of the Currency Keith Noreika expressed concern over the added costs associated with the recently issued arbitration rule, the U.S. Department of the Treasury released a report on Monday detailing the likely monetary and compliance effects of the rule. The new federal arbitration rule intends to limit the ability of financial service providers to restrict class action lawsuits by consumers via arbitration provisions in contracts.

Relying heavily on data gathered by the Consumer Financial Protection Bureau (CFPB) in formulating the rule, the Treasury found that the arbitration rule would spark an additional 3,000 class action lawsuits, cause financial service providers to spend $500 million on legal defense, and create $1.7 billion in settlements. As Acting Comptroller Noreika warned last month, those increases in costs will be passed onto consumers through higher borrowing costs on credit products. The CFPB’s own data showed that only 13% of class action lawsuits resulted in a class-wide recovery, so the vast majority of the new expenses derived from the rule would not get back to the hands of consumers. The report also pointed to a study that found only 4% of class members attempt to actually recover their payouts, so consumers ultimately place a low value on class action litigation.

The Treasury stressed that the CFPB did little to explain how the arbitration would improve compliance with federal consumer protection laws, an important mission of the Bureau. Congress had legislative 60 days from the publication of the rule to repeal it through the Congressional Review Act. The House moved quickly, but the Senate has yet to vote on a repeal.