This afternoon President Trump is expected to sign a bill passed by Congress, with Vice-President Michael Pence as the deciding vote, that overrules a July 2017 regulation created by the Consumer Financial Protection Bureau to forbid mandatory arbitration clauses in contracts relating to financial services products.
Despite outcry from some on the left, ranging from Senator Elizabeth Warren (D-Mass.) to class-action trial lawyers to CFPB Director Richard Corday, the override bill is another major step towards restoring Congressional oversight of the administrative state. Furthermore, it also ensures that Americans retain the freedom to contract as they see fit, especially concerning items as fundamental to daily life as financial services products (credit cards, banking accounts, mortgages and other loans, etc.).
Congress passed the CFPB-override bill last week through the Congressional Review Act (CRA), a Gingrich-era bill that allows Congress to block regulations created by administrative agencies within a brief time-window. Prior to the Trump Administration, Congress only exercised this power once since its creation in 1996, that one time being all the way back in 2001. However, since President Trump took office, the CRA has been successfully utilized almost a dozen and a half times.
Those of us who believed in the constitutional balance and separation of powers should applaud that Congress is returning to its proper role as the prime originator of policymaking. The administrative state serves an important purpose within the executive branch; nonetheless, when left to run amok and unchecked, it has worrying effects on our ability to self-govern and hold our institutions accountable.
Additionally, the CFPB rule barring mandatory arbitration itself is questionable on multiple policy fronts. Mandatory arbitration clauses, which are far from universal in financial products, are a contract term that participants in a financial services transaction willingly enter. Arbitration does not inherently favor either consumers or an institution, as studies have shown arbitrators give just as many wins for consumers as courts, and even actually slightly more.
Arbitration is increasingly used as an alternative legal mechanism to the courts because, compared to litigation, it is often far more efficient, timely, and private. Lawsuits are extraordinarily expensive, wasteful, and time-consuming. Arbitration offers a way for consumers to resolve their problems without having to seek a high-priced trial lawyer or join a grueling class-action lawsuit.
Because of how arbitration moves the dispute from the courts to mediators, many who benefit off of lawsuits, such as class-action trial lawyers, were especially in favor of a rule barring mandatory arbitration.
Class-action lawsuits are nowadays as ubiquitous as the profits they rain down on trial lawyers. When a trial lawyer pursues a class-action lawsuit, they can bring together all the legal claims of the consumer or citizen group they claim to represent and sue for often enormous sums of money in prolonged and costly lawsuits. In the end, consumers usually end up with a mail notice for a nominal award at best, while the trial lawyers come off with extraordinary legal fees and winnings.
CFPB Director Richard Corday sent a letter a few days ago to President Trump asking him not to sign the CRA rule repeal, claiming that in the end, it came down not to studies and data but to what’s best for American consumers. It is true that our elected officials should look to what’s best for the American people, and in this case, it is precisely by protecting our economic freedom to contract and ability to engage in arbitration.
Furthermore, the CFPB Director’s aversion to data and studies in the letter may not be coincidental, as a recent study by the U.S. Treasury Department revealed that the CFPB did not properly study the extraordinary costs on consumers the rule would likely have.
The Treasury Department believes the rule in the next 5-years would add over 3,000 new class-action lawsuits and cause businesses to spend $500M+ in legal fees. Trial lawyers would benefit with an estimated $330M+ in new legal earnings, but 87% of cases are estimated to give essentially no reward to consumer plaintiffs.
The president and Congress have undoubtedly accomplished a major win for Americans consumers by protecting their right to engage in the kinds of contracts and transactions they wish to engage in, as well as offering access to cheaper and more efficient legal mechanisms such as arbitration, to resolve disputes. Refusing to line the pockets of class-action lawyers may upset lobbyists and grasstops organizers, but the move will bring significant returns to the very people the administration has pledged to protect.