If you’ve been following the debate in Washington over forced arbitration, you know that there’s been one all-consuming issue: whether Congress will overturn the Consumer Financial Protection Bureau’s (CFPB’s) rule prohibiting class-action bans in arbitration agreements for consumer financial products before the deadline (which is probably November 13) to do so via the Congressional Review Act (CRA), a law that allows Congress to intervene and kill an agency’s rule within a set number of days.
The CFPB rule was the result of years of data-based study, ultimately concluding that consumers are better off if they can band together in court to hold big banks – like Wells Fargo, for example -- liable when those banks break the law. Individual consumers rarely find it worthwhile to pursue small claims in arbitration on their own, and even if they did, because arbitration is secret, it would not stop big banks from continuing their lawless practices.
This isn’t hypothetical. Years before the Wells Fargo fake-account scandal broke, consumers had tried to bring class actions in court against the bank for exactly that practice. But because Wells Fargo’s consumer agreements contained an arbitration agreement with a class-action ban, the claims were dismissed, and consumers’ only option was to bring their small-dollar individual claims in secret arbitration. As such, Wells Fargo was able to spend several more years defrauding consumers and avoiding liability in court. These forced arbitration agreements simply let the big corporate actor off the hook.
Unsurprisingly, the CFPB rule is wildly popular among both Democrat and Republican voters in both red and blue states. Also unsurprisingly, it is wildly unpopular in the banking industry, which is getting increasingly creative in the ways it tries to bash the CFPB rule – and the agency’s Director, Rich Cordray - as the CRA deadline approaches.
Thanks to President Trump, bankers now have another very good friend in government, Keith Noreika, acting head of the Officer of the Comptroller of the Currency (OCC), the agency that regulates national banks, and also an agency viewed as being very much captured by the industry and whose lax regulation is widely blamed for the Great Recession. Before his temporary gig at the OCC—he hasn’t gone through any ethics or confirmation process—Noreika was a lawyer representing the likes of Wells Fargo and JPMorgan Chase in court, arguing that they shouldn’t have to follow state law.
Since he stepped into his role at the OCC, Noreika has been consistently and, unusually for the head of an agency, publicly, criticizing the CFPB rule. First, he tried to say that the rule should be delayed because the OCC needed more time to look into whether the rule would threaten the safety and soundness of the banking system. That didn’t go anywhere for good reason—prior to Noreika’s tenure, the CFPB had worked diligently with the OCC to allay any such concerns and the OCC had had no objection to the CFPB rule. It was evident that it was nothing but a political move.
Second, Noreika has publicly insisted that the rule will, contrary to the conclusion of the CFPB’s lengthy study, actually be bad for consumers because it will force banks to pass along the supposedly substantial increased cost of doing business in a world where banks can’t prohibit consumers from bringing class actions. According to Noreika, the rule is likely to increase the cost of credit by over 3.43%. Well, that does seem bad.
Fortunately, Cordray pointed out that Noreika’s numbers are simply bad math.
Look, I’m not a statistician, and I can’t independently evaluate who employed the right methodology to determine the probabilities of different outcomes. (If you can, here’s the CFPB’s analysis. Have at it.) But I do find Cordray’s version of events—that nixing class action bans will have little or no effect on consumer costs—persuasive. For one thing, the CFPB is specifically tasked with acting in the interests of consumers, and they’ve been studying this for years, whereas there is no question that Noreika has spent his career trying to keep banks from being held accountable. But even putting that to side, here are the facts that demonstrate this isn’t the apocalypse for consumers the banks claim:
· As part of settlement agreements with the government, four of the biggest banks agreed to stop using forced arbitration with class-action bans. There is absolutely no evidence that those banks raised their prices, or that their prices were higher than those of their arbitration-wielding competitors—and in fact, there is some indication that their prices decreased. So our best real-life empirical example indicates that there’s no reason to anticipate any change.
· The supposed increase in cost of credit exceeds the estimated increased costs to banks by an exponential amount—by a ratio of 50-to-1! In other words, if banks increased the cost of credit by 3.43%, they’d be making 50 times the additional amount of money they would need to offset the additional cost of litigating class actions. So even if that increased-cost estimate is off the mark by a factor of two or three, it couldn’t account for such a large increase in consumer cost. If banks passed on 100% of the estimated increased costs to their customers, it comes out to just $1 per customer—a price I’m happy to pay for access to our court system.
· Ninety percent of community banks and credit unions don’t use forced arbitration now. Noreika and others have used the supposedly devastating impact the rule would have on the bottom line of community banks and credit unions to bolster the argument that big players, like Wells Fargo, shouldn’t have to follow it either. But, the vast majority of smaller players already don’t hide behind forced arbitration agreements with class-action bans, so it won’t have any impact on most of that market.
· All this analysis disregards the fact that most of the money spent on increased litigation costs goes back to the consumers that were victims of the banks’ illegal practices. That’s the entire point of the CFPB rule in the first place—to hold banks accountable and obtain justice for wronged consumers.
Finally, there’s no reason to think that banks will necessarily pass on the cost of class-action litigation to its customers at all. Yes, the estimated increased litigation cost is $1 billion, but the U.S. banking industry’s profits last year were a staggering $171 billion. If this rule means that a very small portion of banks’ profits are redirected to the consumers that they defrauded, well, that seems like a fine tradeoff to me.
So it’s no wonder that Cordray and his agency have come under increasing – and increasingly desperate and vicious – attack. The agency has garnered a reputation for defending Main Street, and that doesn’t play well on Wall Street. Sadly, in Trump’s Washington – where Congress has approved a whole line-up of bankers for critical government jobs – any move to protect consumers and hold big banks accountable whips up the full fury of the swamp. Fortunately for Americans, Cordray has stood firm against them, using facts, evidence and common sense to continue doing his job … and doing it a little too well for some.
This post was co-authored by Public Justice Staff Attorney Leah M. Nicholls