The Consumer Financial Protection Bureau’s rule virtually prohibiting mandatory arbitration for financial products will impose significant costs on consumers and businesses and enrich plaintiffs’ lawyers while delivering little tangible relief to consumers, the Treasury Department said today in a new report. The report — which examines data from the CFPB’s own study on arbitration — concluded that “the bureau’s arbitration study and rule do not show that the bureau’s prohibition on arbitration will efficiently improve compliance with the federal consumer financial laws or serve public and consumer interest as the Dodd-Frank Act commands.”
Based on the bureau’s own “incomplete estimates,” Treasury said the rule is likely to generate more than 3,000 additional class action lawsuits over the next five years, cost an additional $500 million in legal defense fees and result in $330 million paid to plaintiffs’ lawyers. It also underscored the CFPB’s own finding that in 87 percent of class actions, plaintiffs receive no compensation and, where relief is generated, plaintiffs receive on average just $32.35 per person, while their lawyers collect $1 million per case. The CFPB neither took into account benefits of arbitration nor conducted a sufficient cost-benefit analysis, the report concluded.
The Treasury report was consistent with points previously raised by the American Bankers Association in comments to the CFPB. The association has long raised concerns that consumers will face increased legal costs and long waits dispute resolution if banks are forced to stop using arbitration. In addition, both ABA and Treasury pointed out that the higher legal fees incurred by banks as a result of the rule could be passed onto consumers.