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Experts Question CFPB’s Use of Data Ronda Churchill

Experts Question CFPB’s Use of Data Featured

If the Consumer Financial protection Bureau’s mandatory arbitration ban fails to take effect, part of the reasons will be questions about the data supporting it. The Dodd-Frank Act that created the CFPB specifically required the agency to study the use of mandatory arbitration agreements in finance contracts. The CFPB released the results of that study in March 2015. In announcing the ban, the CFPB said the study “showed that few consumers ever bring – or consider bringing – individual actions against their financial service providers either in court or in arbitration.” The Republican Senators who are moving to block the rule cited what they consider poor use of data. “This rule is based on a political study that 86 members of Congress warned was ‘not fair, transparent, or comprehensive,’” said Sen. Pat Toomey in a release about the Senate resolution. “Rather than reexamine its defective study, the CFPB has chosen to forge ahead with a flawed rule. Congress must now exercise its authority to block it.” A major problem with the CFPB’s use of the study is an attempt to portray the benefits of class-action suits versus arbitration. The release says the study found that “over 34 million consumers received payments, and that $1 billion was paid out to harmed consumers over the five-year period studied.” By contrast, the study found that “in the roughly one thousand cases in the two years that were studied, arbitrators awarded a combined total of about $360,000 in relief to 78 consumers.” The CFPB release says this proves “(i)ndividual actions get less overall relief for consumers than group lawsuits because companies do not have to provide relief to everyone harmed.” While this is true, the amount individuals actually received is far greater under arbitration than class action using these examples – $4,615 on average of arbitration vs. $29 for class action. “If finalized, this rule would actually cost consumers more in the long run by pushing consumers into class action lawsuits as opposed to arbitration,” said Sen. Mike Rounds. Terry O’Loughlin, director of compliance for Reynolds & Reynolds, said the payment per consumer might prove small, but the cost of the company being sued is huge. “Even just defending them can be very expensive,” O’Loughlin said. The CFPB does give a secondary reason in favor of class actions and that is their ability to promote behavioral changes. Another unusual aspect of the CFPB’s use of data in creating this rule comes from the use of alerts issued by law firms. These are summaries sent out to a law firm’s client and others that provide information on recent activity on everything from legislation to court decisions to regulatory actions. Joann Neddleman, an attorney with Clark Hill, said the CFPB used an increase in alerts warning of class-action lawsuits as part of its justification for the arbitration ban. Neddleman said attorneys at her firm can’t recall another time alerts were cited in this way.