by Jeff Sovern
I wanted to comment on a couple of op-eds opposing the CFPB arbitration rule. One is Joseph Cioffi's piece in the American Banker, headlined CFPB arbitration rule will still pose costs to consumers. Though Cioffi (Chair of the Insolvency, Creditors’ Rights & Financial Products Practice Group at Davis & Gilbert) sees the arbitration rule as having some positive aspects, he believes it will also be "an expensive proposition for banks and consumers alike." He writes:
The Trump administration and GOP-controlled Congress aim to weaken the CFPB’s enforcement powers as part of a larger deregulatory effort. If that occurs, plaintiffs may have a better chance of convincing courts that their class action, versus government action, is the superior method of prosecuting claims. Further, as banks self-regulate according to their own standards in a deregulated environment, market inconsistencies and consumer uncertainty may result in yet more litigation.
That paragraph left me confused. Cioffi seems to be saying that a weaker CFPB may lead more courts to allow class action to proceed. But as far as I know, courts shouldn't take the CFPB into account in deciding whether or not to certify a class. In addition, it sounds as if Cioffi, an apparent opponent of the CFPB rule, is arguing that consumers should be left without any recourse when financial institutions misbehave, except for arbitration, which of course is ineffective as to small claims. Finally, the last sentence suggests that self-regulation will lead to more litigation. But self-regulation is essentially voluntary self-restraint; how can that lead to litigation?
Cioffi also states:
Any significant shock to the legal and regulatory landscape that increases uncertainty and exposure is likely to be passed on to consumers and reflected in higher prices and potentially reduced offerings.
Except that the CFPB study found that firms that stopped using arbitration clauses did not thereafter increase their prices, so whatever merit that sentence possesses, not only does no evidence support it in the arbitration context, but the existing evidence contradicts it.
Cioffi also recycles the usual and (to my mind) discredited claim that arbitration produces bigger recoveries than class actions. And he writes:
In a world of less regulation and more litigation, banks’ attention will need to shift to whether their actions can be defended, rather than merely whether they are lawful — hardly an environment conducive to creating new, competitively priced products and services that serve consumers. Further, in the void left by deregulation, enforcement may be left to the creativity of plaintiffs’ counsel; debates regarding what may constitute appropriate behavior by financial institutions will increasingly play out in the courtroom.
The implication is that lawful products cannot necessarily be defended, which also confused me: if they are lawful, why can't they be defended? And is he arguing that deregulation is bad (something I agree with but that I wouldn't expect from a lawyer who represents financial institutions)? If not, what should limit what banks do? For example, should they be free to resume the lending that led to the Great Recession?
The other piece was by Ted Frank in the Wall Street Journal, Congress Can Rescind the CFPB’s Gift to Trial Lawyers. Frank does important work attacking class actions that seem to offer little benefit to consumers, and he knows a great deal about class actions, so his views merit special attention. One of Frank's claims is that many class actions don't benefit consumers because few consumers actually submit claims. I agree that there is a problem with class actions in which few consumers receive benefits, but I disagree with Frank that that justifies rescinding the arbitration rule, for a couple of reasons. First, consumers do receive compensation in some class actions. Indeed, in some class actions, banks deposit money directly into consumer accounts so that consumers need not file claim forms. We reported on such a class action just last week and that will also be true of the Wells Fargo unauthorized account class action, if the settlement is approved. Class actions involving financial institutions seem particularly likely to be that sort of class action, and of course it is those institutions that the CFPB rule covers. Rescinding the CFPB rule would leave those consumers without compensation, unless they filed arbitration claims, something which in most small claims almost never happens. Second, as the CFPB pointed out in its statement accompanying the rule, class actions benefit consumers by deterring misconduct. That is true whether or not consumers obtain compensation. If the CFPB rule is blocked and the CFPB's enforcement efforts are weakened, as Cioffi predicts, what will be left to deter bank misconduct? A handful of arbitration claims? Given the importance of class actions to compensate injured consumers and deter misconduct, I think we would be better off finding ways to make them work better rather than enable companies to opt out of them altogether without consumers even realizing that that is happening.
Frank sees the CFPB rule as a gift to lawyers, as the headline on his piece says (I don't know the practice at the WSJ, but the convention at most places is for the publication, not the author, to choose the headline). He writes: "class-action lawsuits mostly benefit lawyers." Personally, I don't see anything wrong with lawyers earning a living from bringing cases that help consumers–as long as they really do help consumers–just as I don't see anything wrong with the fact that authors, say, can earn a living out of writing books that confer only a small benefit to individual readers. But I guess we disagree about whether class actions benefit consumers.
Frank also wrote:
The agency justifies its rule by claiming it found that 79% of money paid in class-action settlements goes to consumers. The statistic is bogus. * * *
How did the CFPB study treat settlements * * * in which there is no public information about how much the class received? It assumed every class member got paid, then calculated its ratio based on that fictional “gross relief” number. The agency also calculated a “net relief” ratio based on actual payments—but that ratio ignored all settlements in which the actual payments were not disclosed, as well as those in which the class received no cash at all and the attorneys got 100% of the proceeds.
I don't have time to go back to the CFPB study to respond to that; perhaps some reader will and will provide a comment. But hearing that the CFPB assumed that money was paid to consumers when it wasn't does concern me.
Trial lawyers are a major source of Democratic funding and can expect lockstep Democratic opposition to efforts to repeal the rule, as happened in the House. * * *
It is perfectly fair to point out the contributions by lawyers, just as I and others have pointed out contributions by financial institutions (here, for example, is my post noting that 2016 contributions by lawyers and law firms amounted to about 3% of those from financial institutions). Perhaps some think I am biased because my law school accepted a grant from the American Association for Justice Robert L. Habush Endowment of under $30,000 to fund research I, along with others carried out into arbitration. But what's sauce for the goose is sauce for the gander. Does Mr. Frank's home base, the Competitive Enterprise Institute, receive funding from financial institutions? If so, from whom and how much? Just to make clear, I don't believe Mr. Frank's views would be affected by such contributions, just as my views were not affected by the modest grant we received to pay for our research, but if it is fair to talk about contributions to supporters of the arbitration rule, it is also fair to ask about contributions to its opponents.