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Tags: cfpb | credit | consumers

Financial Protection Bureau Takes Aim at Consumers

By    |   Friday, 06 May 2016 03:12 PM EDT

The Consumer Financial Protection Bureau (CFPB) just proposed limiting binding-arbitration clauses in credit card contracts and other forms of consumer credit. This does not come as a surprise, as these clauses are already banned in mortgage contracts, and the CFPB has been examining the role they play in credit card contracts for some time, issuing a report in 2015 leading those who monitor regulatory agencies to anticipate such a move.

But while this proposed rule change will be hailed by supposed consumer protection advocates, it is unlikely to be as appreciated by consumers themselves, who will bear collectively the costs of frivolous lawsuits brought about more in anticipation of the hefty fees that class action attorneys collect rather than a desire to recompense wronged consumers.

The CFPB contends that these clauses, though agreed to willingly by participants and thus seemingly an example of Americans exercising their desire and freedom to enter in contracts freely with one another, abridge consumers’ rights to sue as individuals or to form classes and sue collectively, should they feel themselves victimized by fraud on the part of their bank or credit card company.

Foregoing the obvious point that there are instances where litigation is the appropriate recourse for a wronged consumer, this proposed rule change invites a broader conversation about the nature of class action lawsuits, and the benefits and drawbacks they pose to would-be classes.

First, the obvious advantages: just as union members leverage the collective weight of their membership organizations to bargain with corporations, consumers, for whom the certain costs of mounting a legal challenge as individuals often outweigh the uncertain benefits a potential legal victory, can reasonably form a class of consumers and leverage their collective weight in order to distribute the costs of litigation.

Class action lawsuits have given many consumers (indirect) access to a caliber of attorney they might not otherwise have had and have given recourse to citizens who otherwise might have not felt it within their grasp to pursue justice in the courts.

Many civil rights victories, including the desegregation of some schools, have come about due to class action lawsuits (though one could reasonably argue that trends in democratic governance would have brought these changes about sooner or later).

Unfortunately, class action lawsuits today often appear to be brought only in search of fees for the attorneys litigating them, rather than in an effort to defend civil rights; and they are now frequently settled with negligible benefits passed onto the consumer classes they represent.

Seemingly more often than not, class action settlements serve to “maximize the illusion of relief,” according to my colleague, Ted Frank, director of the Center for Class Action Fairness at the Competitive Enterprise Institute, in a recent New York Times interview.

He further notes, in a paper for the Manhattan Institute, that not only are there structural inefficiencies inherent to class action lawsuits that are detrimental to consumers, but conversely, “Compared with class actions, individual arbitration is notably efficient and effective at protecting consumer rights. Instead of taking years, the average consumer arbitration lasts just short of seven months. Also, despite claims to the contrary, consumers achieve equal or greater recoveries in arbitration compared with class actions. Consumers, unsurprisingly, prefer arbitration over litigation.”

Caleb Johnson is managing and founding principal of Applied DC Strategies, LLC, a Washington based consulting firm. He is also the associate director of the Transnational Threats Project at the Center for Strategic and International Studies (CSIS) and an adjunct scholar focusing on financial regulation at the Competitive Enterprise Institute (CEI). The opinions expressed in this article are the author's own and do not reflect the views of his employer.

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The Consumer Financial Protection Bureau (CFPB) just proposed limiting binding-arbitration clauses in credit card contracts and other forms of consumer credit.
cfpb, credit, consumers
Friday, 06 May 2016 03:12 PM
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