CFPB arbitration rule will still pose costs to consumers

The Consumer Financial Protection Bureau’s rule banning mandatory arbitration clauses is bad news for banks. For consumers, it might be both good news and bad news.

It is tough for anyone to mount strong opposition to the CFPB’s arbitration rule, particularly as reports continue about the misdeeds at Wells Fargo, including the bank’s admission that it forced borrowers to pay for auto insurance they did not need. Although Senate approval of the rule remains uncertain, banks and other lenders should still prepare for it to take effect. Meanwhile, although the new limits on arbitration may seem like a win for consumers in terms of expanding the legal options available to pursue financial institutions for misconduct, consumers should prepare for higher costs as a result of the rule. This is especially true in the current deregulatory environment.

In many respects, complying with the rule will be relatively straightforward. Providers of consumer financial products and services will need to amend their form consumer contracts, so that they do not prohibit class action litigation, and ensure compliance with new associated reporting requirements regarding transparency in arbitration. Going forward, banks will also have to consider whether any modifications to their products or services trigger the need to amend agreements that existed before the effective date of the rule (the CFPB is seeking to prevent banks from circumventing the rule through reliance on existing agreements).

But there is another layer of complexity, for which preparation is much more difficult. The CFPB’s rule would likely lead to the filing of more class actions in any economic or political environment. But in this era of deregulation, it could have a combustible effect. The Trump administration and GOP-controlled Congress aim to weaken the CFPB’s enforcement powers as part of a larger deregulatory effort. If that occurs, plaintiffs may have a better chance of convincing courts that their class action, versus government action, is the superior method of prosecuting claims. Further, as banks self-regulate according to their own standards in a deregulated environment, market inconsistencies and consumer uncertainty may result in yet more litigation.

If this multiplier effect on litigation occurs, it would not be without costs to consumers.

Banks determine the appropriate range of products and services to offer, as well as their prices, in part on their own assessment of regulatory and legal risk. Any significant shock to the legal and regulatory landscape that increases uncertainty and exposure is likely to be passed on to consumers and reflected in higher prices and potentially reduced offerings.

To be sure, the rule would serve a worthy goal of protecting consumers by expanding the weapons available to them and allowing them, in theory, to choose the option best suited to their particular claim. The die may have been cast as early as 2015 when the CFPB released its study of arbitration agreements for consumer financial products and services, which found that the most commonly asserted claims under the Fair Credit Reporting Act, Fair Debt Collection Practices Act and the Truth in Lending Act rarely resulted in relief to consumers.

Since then and in the wake of the Wells Fargo fake-accounts scandal, the CFPB has warned covered providers to avoid certain activities that could lead to consumer abuses, including misrepresentations of the benefits of products, steering customers to products that are inappropriate for their needs, improper collection practices, and reporting and compensation structures that create an environment where these activities are more likely to occur. The CFPB now appears convinced that the prospect of arbitration alone is just not enough to deter these types of activities; the potential for consumers to band together in a class action and litigate is a bigger stick.

However, it’s unclear whether the prospect of litigation would have prevented the conduct that led to the Wells Fargo auto insurance fiasco, had the ban on mandatory arbitration been in place. According to Wells Fargo, that situation was a case of one hand not knowing what the other was doing, and it has announced plans to refund affected consumers. Going forward, a weaponized consumer is more likely to deter purposeful misconduct than incompetence.

In a world of less regulation and more litigation, banks’ attention will need to shift to whether their actions can be defended, rather than merely whether they are lawful — hardly an environment conducive to creating new, competitively priced products and services that serve consumers. Further, in the void left by deregulation, enforcement may be left to the creativity of plaintiffs’ counsel; debates regarding what may constitute appropriate behavior by financial institutions will increasingly play out in the courtroom. And yet, even the CFPB's own studies show that individuals on average receive less in class actions after legal fees than they do in arbitration. All of this makes the CFPB’s arbitration rule an expensive proposition for banks and consumers alike.