Congress Shreds Another Pro-Consumer Regulation

ATTORNEY: SUSAN J. WEISWASSER
POMERANTZ MONITOR NOVEMBER/DECEMBER 2017

As noted in earlier editions of the Monitor, class action “reform” is most often anything but. Witness the Senate’s October 25 passage of a resolution ending the Consumer Financial Protection Bureau’s (CFPB)’s regulation that banned the use of mandatory arbitration clauses in consumer financial agreements. Those clauses not only mandated arbitration but also prevented aggrieved consumers from suing as a class. The House had already voted down the regulation in July, only two weeks after it had been released. On November 2, the President signed the joint resolution, thus killing the regulation for the foreseeable future.  

The CFPB was one of several new agencies established in 2010 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The overarching purpose of Dodd-Frank was to address weaknesses in the regulation of financial institutions that led to the financial crisis and recession of the late 2000’s. As the Washington Post noted at the time of Dodd-Frank’s passage, the CFPB was established “to protect borrowers against abuses in mortgage, credit card and some other types of lending[,] … give[] the government new power to seize and shut down large, troubled financial companies[,] … and set[] up a council of federal regulators to watch for threats to the financial system.”

As part of its mandate, the CFPB was tasked with studying the effect of mandatory arbitration provisions in consumer financial contracts. (Dodd-Frank expressly proscribes the use of arbitration clauses in mortgage contracts.) The results, released in early 2015 after a multi-year study, confirmed what many consumers and creditors already knew: customers hardly ever pursue individual legal actions or arbitration against financial service providers. Ultimately, therefore, clauses barring participation in class actions choke off all avenues of relief that wronged consumers might have otherwise received.

The main reason for this failure to litigate or arbitrate on an individual basis is that, unless their losses are large, the investment of time and money required to pursue an individual action is simply not worth it. Moreover, arbitration clauses commonly require the losing party to pay the legal fees of the winning party. This risk is even greater where creditors employ lawyers with high rates who can staff a case with several attorneys.

Since attorneys’ fees in class actions are awarded only if there is a recovery, and are spread out among the entire class, this is the only economically feasible way to pursue all but the largest consumer claims.

Another important advantage to class actions is that the relief granted may include changes to the offender’s business practices, known as equitable relief. Some examples of these changes are writing protections against self-interested transactions-in-lending into a bank’s policies, and incorporating heightened disclosure requirements by credit card companies into consumer contracts. In the long run, these changes can be of greater value than cash payments as they protect consumers into the future and serve as deterrents for potential bad conduct.

So it was particularly troubling when Congress, claiming concern for consumers and economic growth, used an obscure rule to abolish the CFPB regulation. Under the Congressional Review Act (“CWA”), legislators can disapprove regulatory rules of federal agencies before they take effect if done within sixty “legislative” days after the regulation’s release. And this is what Congress did, in an action that typifies its tactics since January. Unable to pass their own laws, legislators have taken to canceling existing regulations even when members have previously supported deference to an agency’s decisions. Since the 2017 inauguration, Congress has effectively invoked the CWA at least 14 times. Previously, the Act had been used successfully only once since its passage in 1996.

According to a recent Washington Post article, members of Congress  who voted for the CFPB rule’s abolition maintained that keeping  it “would trigger a flood of frivolous lawsuits and drive up credit card rates. Arbitration, they argued, was a faster, cheaper way to settle disputes.” That argument presupposes that all or most consumer class actions are “frivolous.” That is a self-serving assumption promulgated by the potential targets of such litigation, such as big banks. Those lawsuits  that are truly frivolous usually do not get very far, and the possibility that some class actions might not have much merit hardly justifies eliminating them altogether – which is the practical effect of these mandatory arbitration clauses.

Moreover, class actions provide significantly greater monetary relief than individual court cases or arbitrations. The CFPB’s study noted that “between 2010 and 2012, across six different consumer finance markets, 1,847 arbitration disputes were filed. More than 20 percent of these cases may have been filed by companies, rather than consumers.

In the 1,060 cases that were filed in 2010 and 2011, arbitrators awarded consumers a combined total of less than $175,000 in damages and less than $190,000 in debt forbearance. Arbitrators also ordered consumers to pay $2.8 million to companies, predominantly for debts that were disputed.”

At the same time, “[a]cross substantially all consumer finance markets, at least 160 million class members were eligible for relief over [a] five-year period studied. The settlements totaled $2.7 billion in cash, in-kind relief, and attorney’s fees and expenses – with roughly 18 percent of that going to expenses and attorneys’ fees. Further, these figures do not include the potential value to consumers of class action settlements requiring companies to change their behavior. Based on available data, the Bureau estimates that the cash payments to class members alone were at least $1.1 billion and cover at least 34 million consumers.”

As the director of the CFPB said in an August 22, 2017, NY Times op-ed piece, “In truth, by blocking group lawsuits, mandatory arbitration clauses eliminate a powerful means to get justice when a little harm happens to a lot of people.” In the current climate of deregulation, there will be more and more little harms that will go unremedied.