Acting Comptroller of the Currency Keith Noreika just released a report claiming that the Consumer Financial Protection Bureau’s (CFPB) important new rule on forced arbitration could lead banks to raise interest rates on credit cards.
Simply put, Mr. Noreika is not to be trusted on this issue. Here’s why:
- Noreika isn’t a regulator, he’s a banking industry-insider. He joined the Comptroller of the Currency from a prominent law firm, where he represented many clients that his agency is supposed to regulate.
- According to The New York Times, “the White House used an administrative quirk to appoint Mr. Noreika to the job… As a result, Mr. Noreika does not need to sign the president’s ethics pledge, allowing him to face fewer restrictions on lobbying and lawyering when he returns to the private sector.”
- In August, The Hill reported that, “Noreika said that he supports lawmakers’ efforts to repeal the arbitration rule.” The report isn’t an independent analysis, it’s clearly designed to bolster his long-held position.
The CFPB’s forced arbitration rule protects consumers that have been taken advantage of by big banks and other financial interests from being forced into secret arbitration tribunals where industry calls the shots and consumers hardly stand a chance.
Below please find a fact check on the erroneous claims made in Noreika’s report on the Arbitration Rule:
RHETORIC: Costs for consumers will increase.
REALITY: While forced arbitration does mean bigger profit margins for law-breaking banks, there is no data showing that banks pass on any savings to consumers.
REALITY: Studies show that consumers saw no increase in price after Bank of America, JPMorgan Chase, Capital One, and HSBC dropped their forced arbitration clauses as a result of a court-approved settlement reached for allegations of violations of federal antitrust law.
- “Financial services companies do not appear to be passing the cost savings of arbitration on to consumers in general. When Bank of America, JPMorgan Chase, Capital One and HSBC dropped arbitration clauses as the result of a litigation settlement their prices did not go up. Nor did mortgage rates go up when Fannie Mae and Freddie Mac stopped buying mortgages with arbitration clauses or when Congress later banned arbitration clauses in mortgages. Binding mandatory arbitration for consumer financial contracts has no consumer welfare benefit.” [Adam Levetin, “BankThink Mandatory Arbitration Offers Bargain-Basement Justice,” American Banker, 05/12/14]
- “And, as arbitration proponents frequently point out, it is theoretically possible that the amounts saved by companies in the form of litigation and settlement costs will be passed on to consumers in the form of lower prices. We are aware of no empirical research that shows this to be the case. Notably, the empirical analysis that does exist suggests the obverse: that forced arbitration clauses do not lead to lower consumer prices. In its arbitration study, the CFPB found that companies forced to drop their arbitration provisions did not go on to raise prices, despite facing greater exposure to class action litigation risk.” [Deepak Gupta and Lina Khan, “Arbitration as Wealth Transfer,” American Constitution Society for Law and Policy, February 2016]
RHETORIC: Arbitration is a faster, cheaper alternative.
REALITY: Arbitration is not an alternative to class action lawsuits. Forcing arbitration on consumers who have been wronged prevents the vast majority of victims from getting any relief.
REALITY: Studies show that most people give up when forced into arbitration, especially for small-dollar claims. Without class actions as an option, only about 25 consumers with claims of less than $1,000 pursue arbitration annually – in contrast to the 34 million Americans from 2008-2012 who received over $2.2 billion through class action awards.
- “Forced arbitration is not an alternative to class action lawsuits; it is a way to prevent the vast majority of consumers from getting any relief. Studies show that most people simply give up when forced into arbitration, especially for small-dollar claims.” [“Responses to Industry Myths and Talking Points,” Fair Arbitration Now, accessed 09/05/17]
- The CFPB found that, “of the 1,847 disputes filed [with the American Arbitration Association] between 2010 and 2012 concerning the six product markets” – credit card; checking account/debit cards; payday loans; prepaid cards; private student loans; and auto loans—consumers alone file “an average of 411 cases each year.” [Arbitration Study, Report to Congress, Consumer Financial Protection Bureau, March 2015]
- In the study of 1,847 disputes filed with the American Arbitration Association from 2010-2012, the CFPB found that only “about 25 disputes a year involved consumer affirmative claims of $1,000 or less.” A review of “federal consumer financial class settlements” from 2008-2012 found the “annual average of the aggregate amount of the settlements was around $540 million per year. This estimate covers, for settlements approved between 2008 and 2012, more than $2 billion in cash relief including fees and expenses and more than $600 million in in-kind relief.” The CFPB found that, of the “236 settlements reporting data (56% of all settlements), 34 million consumers were guaranteed recovery” from financial class action settlements. [Arbitration Study, Report to Congress, Consumer Financial Protection Bureau, March 2015]
- “Forcing 34 million consumers to find their own attorney, establish their individual facts, and take time off work to attend an arbitration will never be more efficient than pooling time and resources between millions of consumers harmed by the same bank or lender to challenge widespread harm.” [“Responses to Industry Myths and Talking Points,” Fair Arbitration Now, accessed 09/05/17]
RHETORIC: Arbitration will no longer be an option.
REALITY: The CFPB rule does not prohibit arbitration – in fact, the Dodd-Frank Act specifically ensures the CFPB cannot prohibit or restrict consumers from entering into voluntary arbitration agreements. If an individual consumer decides that arbitration is the right choice for them, they may pursue it.
REALITY: Arbitration will still be an option for consumers. However, a Pew study found that, under current forced arbitration agreements, many banks force the consumer to pay all the arbitration costs—even if the consumer wins. If arbitration is truly cheaper for banks, they should be willing to pay arbitration fees.
- The CFPB arbitration rule does not prohibit arbitration. Instead, it prevents companies from blocking consumers “from filing or joining a class-action lawsuit.” [Lisa Lambert, “New rule requires U.S. banks to allow consumer class actions,” Reuters, 07/10/17]
- According to the Dodd-Frank Act, “The Bureau [(CFPB)] shall conduct a study of, and shall provide a report to Congress concerning, the use of agreements providing for arbitration of any future dispute between covered persons and consumers in connection with the offering or providing of consumer financial products or services. […] The Bureau, by regulation, may prohibit or impose conditions or limitations on the use of an agreement between a covered person and a consumer for a consumer financial product or service providing for arbitration of any future dispute between the parties, if the Bureau finds that such a prohibition or imposition of conditions or limitations is in the public interest and for the protection of consumers. The findings in such rule shall be consistent with the study conducted […] The authority described […] may not be construed to prohibit or restrict a consumer from entering into a voluntary arbitration agreement with a covered person after a dispute has arisen.” [Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (2010), section 1028(a), accessed 08/16/17]
- “Roughly 240 days from now, banks and other financial companies will no longer be allowed to prohibit customers from banding together in class-action lawsuits through the use of binding arbitration clauses, as the Consumer Financial Protection Bureau today released a long-awaited finalized rule on arbitration. The 775-page rule [PDF] doesn’t ban the use of forced arbitration clauses outright, but it dictates when financial institutions, lenders, and others can use the provisions and creates specific language to be included in consumer contracts.” [Ashlee Kieler, “CFPB’s Finalized Arbitration Rule Takes Away Banks’ ‘Get Out Of Jail Free Card’,” Consumerist, 07/11/17]
- “The rule permits individual arbitration to continue. Banks have no reason to change their practices in individual cases, and if arbitration is truly cheaper for the bank, it should still be willing to pay the arbitrators’ fees.” [“Responses to Industry Myths and Talking Points,” Fair Arbitration Now, accessed 09/05/17]
- A 2014 study released by The Pew Charitable Trusts found that “70% of banks in 2014 included a so-called mandatory binding arbitration clause in their checking account fine print, up from 58% in 2013.” The study found that “roughly one in four banks include” language in their fine print that “essentially requires consumers who pursue a claim against a bank to pay the banks’ expenses — even if the consumer wins the claim.” [Catey Hill, “You won’t believe you bank’s newest fee,” MarketWatch, 04/12/14]