March 28, 2023

Volume XIII, Number 87


March 27, 2023

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Treasury Department Report Eviscerates CFPB Arbitration Rule

In a scathing report released today, the U.S. Department of the Treasury concludes that the CFPB’s final arbitration rule “failed to meaningfully evaluate whether prohibiting mandatory arbitration clauses in consumer financial contracts would serve either consumer protection or the public interest — its two statutory mandates.”  Moreover, according to the report, the arbitration rule will impose “extraordinary” economic costs on businesses and consumers by generating a “massive” increase in class action litigation that will not benefit consumers but will effect a “large wealth transfer” to their lawyers.

The Treasury Department report follows a recent analysis by the Office of the Comptroller of the Currency which, as we reported, found that the arbitration rule will significantly increase the cost of consumer credit.

The Treasury Department report sweeps even more broadly and undercuts virtually all of the factual and legal underpinnings of the arbitration rule, exposes its numerous fundamental defects and turns the CFPB’s own data on their head.   It concludes, among other things, that:

  • The rule will generate more than 3,000 additional federal court class actions over the next five years which will cause affected businesses to incur more than $500 million in additional legal defense fees, $330 million in payments to plaintiff’s lawyers and $1.7 billion in additional settlements.  This excludes the cost of additional state court class actions, which the CFPB was unable to calculate but which we have estimated as adding another $2.6 billion to industry defense costs.
  • Although the vast majority of consumer class actions deliver “zero relief” to putative class members, the arbitration rule “will transfer an additional $330 million over five years to the plaintiffs’ bar.”
  • The CFPB failed to make “a reasoned showing that increased consumer class action litigation will result in a net benefit to consumers or to the public as a whole,” failed reasonably to consider “whether improved disclosures regarding arbitration would serve consumer interests better than its regulatory ban,” did not adequately assess “the share of class actions that are without merit” and offered “no foundation for its assumption that the rule will improve compliance with federal consumer financial laws.”

We couldn’t agree more.

The Treasury Department report is extremely timely, as the Senate is poised to vote on whether to repeal the arbitration rule and the finance industry has sued the CFPB to enjoin its implementation.

Copyright © by Ballard Spahr LLPNational Law Review, Volume VII, Number 296

About this Author

Kaplinksy, partner, New York, finance

Alan S. Kaplinsky is Co-Practice Leader of the firm's Consumer Financial Services Group, which has more than 115 lawyers. Mr. Kaplinsky devotes his practice exclusively to counseling financial institutions on bank regulatory and transactional matters, particularly consumer financial services law, and defending financial institutions that have been sued by consumers in individual and class action lawsuits and by government enforcement agencies. Visit Mr. Kaplinsky's profile in Wikipedia.

Mark Levin, Ballard Spahr Law Firm, Litigation Attorney

Mark J. Levin is known for his work in complex commercial, insurance, and class-action litigation, with particular experience in consumer finance litigation, the structuring and enforcement of consumer arbitration clauses, and the defense of insurance companies in class actions. He testified in 2007 for the lending industry before a subcommittee of the U.S. House Judiciary Committee at an oversight hearing on whether mandatory arbitration in consumer contracts is fair to consumers.

Mr. Levin has represented banks in defending against the first...