This summer, the Consumer Financial Protection Bureau issued a rule that prevents financial companies from using arbitration clauses to deny groups of consumers the ability to pursue their legal rights in court. We put this rule in place after conducting a comprehensive study that found that these clauses were effectively blocking billions of dollars of relief for millions of harmed consumers. Opponents of our rule are now doing everything they can to prevent these protections from taking effect.
The latest effort is outlined in a recent column by Keith Noreika, the acting comptroller, which is his second gratuitous attempt to undermine the evidence that supports our rule. Both times he has relied on so-called analysis that is simply embarrassing.
{mosads}He first went out of his way to opine on our rule when he claimed, out of the blue, that it threatened the safety and soundness of the banking system. His agency had consulted with us repeatedly through the rule writing process without raising such objections. Yet he abruptly asserted that the banks were existentially threatened by this simple rule, which does not even ban arbitration in consumer disputes.
Instead, it simply prevents mandatory pre-arbitration clauses from blocking consumers from banding together to pursue their legal rights in court. People can still opt out of group lawsuits if they want to pursue their claims on their own, and they can agree to arbitrate individual disputes on a voluntary basis.
We pointed out the farfetched nature of those claims at the time. The total costs of the arbitration rule are pegged at under $1 billion per year, compared to bank profits of $171 billion last year and an asset base of many trillions of dollars. The acting comptroller ultimately stood down and decided not to challenge the rule before the Financial Stability Oversight Council.
Now he presents a new claim that the rule will impose high costs, in the form of a 3.43 percent increase in credit card interest rates, on consumers. This claim is demonstrably bogus. Based on an analysis that our economists have produced, the claim rests on a rudimentary statistical error of confusing the inverse of a p-value with the probability that a hypothesis is true. In laymen’s terms, this claim is the equivalent of flipping a coin twice, having both come up heads, and declaring that the coin is “very likely” to have heads on both sides. It does not hold water.
His claim that the arbitration rule is expected to cause a 3.43 percent increase in credit card rates also flunks basic economics. As part of a 2009 settlement, some large firms covering a significant part of the market stopped using arbitration clauses. The data did not show this led to any jump in the rates they charge to consumers or that they have been charging much higher rates than their competitors ever since.
In fact, the orders imposed by the lawsuit expired years ago and none of the companies has reinstituted an arbitration clause, which suggests they are at no tangible competitive disadvantage and are not suffering any significant loss of profits. He also incorrectly claims there is no evidence that banks will change their behavior if they are more likely to be sued. When banks were sued for reordering bank debits to charge more overdraft fees, or for manipulating foreign currency conversion fees, many banks changed their practices accordingly.
The acting comptroller’s claim that the arbitration rule is somehow harming community banks and credit unions is also plainly wrong. Over 90 percent of the community banks and credit unions we studied do not even have these clauses in their checking account contracts. Our analysis showed that community banks and other small businesses had a less than one in 1,500 chance of a new class action due to the rule. They are focused on relationship banking and great customer service, not on blocking group lawsuits.
A tremendous effort is being made to shift the focus away from the large companies most affected by the arbitration rule. But recent scandals make it hard to defend denying justice and relief to groups of people who have been wronged. Why should Wells Fargo be able to block groups of customers from suing over fake accounts? Why should Equifax be able to force people to surrender their legal rights when the company put their personal information at risk?
While most small institutions do not use arbitration clauses, they do file group lawsuits. Like consumers, they often lack the resources to engage in legal battles against big companies. Just last month, a credit union filed a group lawsuit on behalf of all credit unions against Equifax for damages caused by the data breach.
Big companies do it as well. Ironically, the Chamber of Commerce, a staunch opponent of the arbitration rule, has now sued to block it, banding together on behalf of many companies to keep consumers from banding together to assert their own rights in the courts. The fight thus will now be decided in the courts and need not be decided in the Senate. Wherever it is decided, however, the acting comptroller’s errant claims have no legitimate part to play in the ultimate determination.
Richard Cordray is director of the U.S. Consumer Financial Protection Bureau.