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ABA challenges CFPB use of generic clearance for overdraft research

Posted in Overdrafts

The American Bankers Association has sent a comment letter to the CFPB challenging the Bureau’s use of the generic clearance process to conduct research in connection with its overdraft rulemaking.  The letter was submitted in response to the CFPB’s request for approval from the Office of Management and Budget (OMB) under the Paperwork Reduction Act of 1995 (PRA) of an existing generic clearance “to collect quantitative data on effective strategies and consumer experiences….” (Qualitative Consumer Education Generic Clearance).

The CFPB had indicated that the purpose of the Qualitative Consumer Education Generic Clearance was “to develop a deeper understanding of effective financial education and empowerment strategies.”  The ABA asserts that the CFPB “has used this clearance to conduct information collections on substantive and policy-related issues-namely, overdraft services-which is prohibited by the guidance interpreting the PRA that was published by the Office of Information and Regulatory Affairs (OIRA) of the [OMB].”  According to the ABA, this guidance makes such collections subject to the standard PRA clearance process, which requires notice to the public and an opportunity for comment.

The ABA contends that after obtaining approval for the Qualitative Consumer Education Generic Clearance in 2013, the CFPB improperly used the clearance to seek approval, without prior public notice, for an information collection on “Qualitative Research of Consumer Understanding and Decision-making Related to Overdrafts.”  The ABA states that because the collection will clearly inform the CFPB’s overdraft rulemaking, it should have been pursued through a standard clearance. The ABA observes that the topics involved in the collection, such as the frequency of the respondents’ usage of overdraft services, “bear directly on policy questions the Bureau is almost certainly considering as part of its rulemaking on overdraft, including the need for increased disclosures and limitations on usage.”

The ABA urges the CFPB to refrain from improperly using a generic clearance to conduct an individual collection on substantive or policy issues and to seek approval for a standard clearance when it desires to conduct such a collection.  The ABA has also challenged the CFPB’s use of the generic clearance process for previous collections.

 

CFPB May 2016 complaint report highlights credit reporting complaints, complaints from New Mexico consumers

Posted in Credit Reports

The CFPB has issued its May 2016 complaint report which highlights complaints about credit reporting  and complaints from consumers in New Mexico and the Albuquerque metro area.  The CFPB began taking complaints about credit reporting in October 2012.  Credit reporting complaints were also the subject of the CFPB’s August 2015 monthly report.

General findings include the following:

  • As of May 1, 2016, the CFPB handled approximately 882,800 complaints nationally, including approximately 23,900 complaints in April 2016.  As of May 1, 2016, debt collection continued to be the most-complained-about financial product or service, representing about 27 percent of complaints submitted.  Debt collection complaints, together with complaints about credit reporting and mortgages, collectively represented about 68 percent of the complaints submitted in April 2016.
  • Complaints about student loans showed the greatest percentage increase based on a three-month average, increasing about 48 percent from the same time last year (February to April 2015 compared with February to April 2016).  As we noted in our blog post about the April 2016 complaint report, rather than reflecting an increase in the number of borrowers making student loan complaints, the increase most likely reflects that in March 2016, the CFPB began accepting complaints about federal student loans.  Previously, such complaints were directed to the Department of Education.
  • Payday loan complaints showed the greatest percentage decrease based on a three-month average, decreasing about 14 percent from the same time last year (February to April 2015 compared with February to April 2016).  Complaints during those periods decreased from 498 complaints in 2015 to 406 complaints in 2016.  In the March and April 2016 complaint reports, payday loan complaints also showed the greatest percentage decrease based on a three-month average.
  • New Mexico, Minnesota, and Indiana experienced the greatest complaint volume increases from the same time last year (February to April  2015 compared with February to April 2016) with increases of, respectively, 41, 33, and 26 percent.
  • Vermont, Hawaii, and Maine experienced the greatest complaint volume decreases from the same time last year (February to April 2015 compared with February to April 2016) with decreases of, respectively, 20, 19, and 14 percent.

Findings regarding credit reporting complaints include the following:

  • The CFPB has handled approximately 143,700 credit reporting complaints, representing about 16 percent of total complaints.  Credit reporting is the third most-complained-about product or service after debt collection and mortgages.
  • The most-complained-about issue involved incorrect information on credit reports, such as a debt appearing on the report that has been paid or is too old to be enforced in court (which the CFPB suggests “may reflect confusion about the fact that information on past overdue debt, even when paid, or no longer enforceable as a result of limitations often can remain on a credit report.”)  Other complaints involved a debt belonging to another consumer, a debt that is not recognized by the consumer, delays and problems in updating and correcting inaccurate records, and public records being incorrectly matched to a consumer’s credit report.
  • Problems accessing credit reports because of the consumer’s inability to answer identity authentication questions were also raised in complaints.
  • In addition to complaints about the “big three” credit reporting companies, consumer submitted more than 2,000 complaints about specialty consumer reporting companies.  Problems raised by consumers submitting complaints about specialty consumer reporting companies included difficulty resolving inaccuracies, information about other consumers appearing on reports, unfair or inaccurate information in reports used for rental screening, inaccurate reporting of criminal charges or convictions on reports used for background and employment screening, and identity theft.

Findings regarding complaints from New Mexico consumers include the following:

  • As of May 1, 2016, approximately 4,700 complaints were submitted by New Mexico consumers of which approximately 48 percent (2,200) were from consumers in the Albuquerque metro area.
  • Debt collection is the most-complained-about product, representing 31 percent of the complaints submitted by New Mexico consumers and 27 percent of complaints submitted by consumers nationally.
  • The percentage of mortgage complaints submitted by New Mexico consumers was lower than the national average.

CFPB Consumer Advisory Board to meet on June 9

Posted in CFPB General

The CFPB has published a notice in the Federal Register indicating that it will hold a meeting of its Consumer Advisory Board on June 9, 2016 in Little Rock, Arkansas.  The topics to be discussed at the meeting are “an auto lending education initiative, trends and themes, and payday lending.”  Since the CFPB is expected to issue its proposed payday lending/auto title loan rule in conjunction  with its field hearing on small dollar lending on June 2, 2016, the discussion of payday lending at the meeting will presumably include a discussion of the proposed rule.

 

 

Vermont federal district court rules CFPA does not provide private right of action for alleged usurious loans; denies motion to dismiss EFTA claim

Posted in Electronic Payments

A Vermont federal district court recently issued a decision ruling on the defendants’ motion to dismiss a class action involving allegations that an online tribal lending venture violated federal and state law because of alleged usurious interest rates and other allegedly unlawful features.  The decision discusses a wide array of procedural issues, including the enforceability of the arbitration provisions in the plaintiffs’  loan agreements.

Among the noteworthy substantive issues addressed in the decision are whether the Consumer Financial Protection Act (CFPA) created a private right of action and whether the loan agreements violated the Electronic Fund Transfer Act (EFTA) prohibition on conditioning credit on preauthorized electronic fund transfers (EFTs), such as ACH or debit card payments.  In dismissing the plaintiffs’ CFPA claim, the court agreed with the defendants that the CFPA does not provide a private cause of action.  The court noted that while the CFPA expressly authorizes enforcement actions by state attorneys general and state regulators, it is silent on private remedies.  The court observed that “legislative silence on such an issue is most frequently regarded by courts as an expression of legislative intent to exclude private remedies.”

Although the court granted the defendants’ motion to dismiss one plaintiff’s EFTA claim because it was asserted beyond the EFTA’s one-year statute of limitations, the court found that the other plaintiff had alleged facts that could support her EFTA claim.  The defendants’ loan agreement provided that funding of the loans through an electronic transfer “as soon as the next business day” was conditioned on the authorization of payments through recurring (preauthorized) ACH payments, whereas borrowers electing to pay by money order or certified check would have their loans funded by mail in “up to 7 to 10 days.”  The plaintiff argued that the choice between next-day funding with a recurring ACH election and delayed funding with a payment by mail election was a “false choice.”  The defendants argued there was no EFTA violation because ACH authorization was not the only way a borrower could obtain a loan.

The court determined that the EFTA issue was “fact-specific and not one which could be resolved on a motion to dismiss.”  The court observed that the plaintiff might be correct that the defendants “have so obstructed the choice of repayment by check with delay” that the option was a “false choice.”  It also commented that “given the nature of the loan itself-immediate cash at very high interest rates-it seems unlikely that Defendants ever funded a loan to any borrower with repayment by check.”  Nevertheless, the court ruled that “it remains for discovery and for fact-finding to determine if the loan agreement is drafted so as to skate around the restrictions of EFTA.”

To be sure, the EFTA strategy adopted by the defendants in this case was highly aggressive.  A range of less aggressive options remain available to creditors, including: (1) providing an election between EFT repayment and repayment by remotely created checks or credit cards; (2) charging a cost-related pricing differential between an EFT election and an election to repay some other way; and (3) freely allowing repayment by check or some other method but requiring the borrower to authorize a backup payment by EFT any time a payment is not otherwise received by the due date.  All of these methods—and others—require careful analysis and drafting, as well as solid legal and practical judgment concerning risks and benefits.

 

 

 

Comment period on CFPB proposed arbitration rule ends August 22

Posted in Arbitration

With the publication of the CFPB’s proposed arbitration rule in today’s Federal Register, the 90-day comment period is now running.  Comments on the proposal must be received on or before Monday, August 22, 2016.

The proposed rule would prohibit covered providers of certain consumer financial products and services from using an agreement with a consumer that provides for arbitration of any future dispute between the parties to bar the consumer from filing or participating in a class action with respect to the covered consumer financial product or service.  The proposed rule would also require a covered provider that is involved in an individual arbitration pursuant to a pre-dispute arbitration agreement to submit specified arbitral records to the CFPB.

 

SCOTUS decides FDCPA case

Posted in Debt Collection

On May 16, 2016, the U.S. Supreme Court unanimously held in Sheriff v. Gillie that an independent contractor to the Ohio Attorney General (OAG) did not mislead consumers in violation of the Fair Debt Collection Practices Act (FDCPA) when it used the OAG’s letterhead in correspondence with consumers in collecting debts owed to the State of Ohio.  It also held that the contractor’s use of OAG letterhead did not violate the FDCPA’s prohibition on a debt collector’s use of a name other than its “true name” in debt collection communications.

The CFPB submitted an amicus brief in which it argued that whether the letters sent by the defendants violated the FDCPA should be judged from the perspective of “the least sophisticated consumer” and, because a reasonable jury could conclude that the letters violated the FDCPA, the Sixth Circuit had correctly reversed the district court’s grant of summary judgment for the defendants.  The Supreme Court’s determination that the letters “were truthful” is an implicit rejection of the CFPB’s argument that the letters created an issue of fact to be decided by a jury.  The Court noted that as a result of such determination, it need not consider the argument “whether a potentially false or misleading statement should be viewed from the perspective of ‘the least sophisticated consumer.'”

For more on the Supreme Court’s decision, see our legal alert.

 

 

CFPB launches Spanish-language Twitter and Facebook accounts

Posted in CFPB General

The CFPB recently announced that it has launched official Spanish-language Twitter and Facebook accounts.  The CFPB previously launched a Spanish-language website and recently updated the translations on the “Ask CFPB” feature on its website.

In its blog post about the Twitter and Facebook launch, the CFPB notes that it is “working to ensure that consumers can build the skills and get the information they need to make informed financial decisions for themselves and their families.  We know that many consumers speak Spanish at home—more than 70 percent of Hispanics according to the 2013 Census, and that number is growing.  To better serve these consumers, we are working to provide more Spanish-language resources, both online and in print.”

The CFPB has previously indicated that limited English proficiency (LEP) borrowers are a priority and suggested that financial institutions should be able to take steps similar to those taken by the CFPB to support LEP customers.  However, as we have observed, the CFPB’s expectations for serving LEP customers present numerous challenges for financial institutions, including UDAAP and fair lending risks, and the CFPB has not yet provided financial institutions with guidance about how to serve LEP consumers without taking such risks.  In November 2015, we conducted a webinar on the issues that institutions should consider when taking steps to serve LEP consumers.

 

CFPB releases Spring 2016 rulemaking agenda

Posted in Arbitration, Mortgages, Overdrafts, Payday Lending, Prepaid Cards, Small Business

The CFPB has released its Spring 2016 rulemaking agenda.  The agenda sets the following timetables for key rulemaking initiatives: 

Arbitration.  The Spring 2016 agenda does not reflect the CFPB’s release of its proposed arbitration rule on May 5, 2016, stating only that the CFPB “is preparing to issue a Notice of Proposed Rulemaking this spring.”  The CFPB’s proposed rule would prohibit covered providers of certain consumer financial products and services from using an agreement with a consumer that provides for arbitration of any future dispute between the parties to bar the consumer from filing or participating in a class action with respect to the covered consumer financial product or service.  The proposed rule would also require a covered provider that is involved in an individual arbitration pursuant to a pre-dispute arbitration agreement to submit specified arbitral records to the CFPB.  We do not expect to see a final rule until next year.

Payday and deposit advance loans.  The Spring 2016 agenda also does not reflect the CFPB’s announcement that it will hold a field hearing on small dollar lending in Kansas City, Missouri on June 2, 2016.  We anticipate the field hearing will coincide with the CFPB’s release of its proposed rule which is expected to cover single-payment payday and auto title loans, deposit advance products, and certain high-rate installment and open-end loans.  The Spring 2016 agenda indicates only that the CFPB is “conducting a rulemaking to address consumer harms from practices related to payday loans and other similar credit products” and gives a June 2016 estimated date for issuance of a Notice of Proposed Rulemaking (NPRM).

Prepaid financial products.  In November 2014, the CFPB issued a proposed rule for prepaid financial products, including general-purpose reloadable prepaid cards and certain digital and mobile wallets.  The Spring 2016 agenda estimates the issuance of a final rule in July 2016.  The Fall 2015 agenda had estimated that a final rule would be issued in March 2016.

Overdrafts.  The CFPB issued a June 2013 white paper and a July 2014 report on checking account overdraft services.  In the Spring 2016 agenda, as it did in the Fall 2015 agenda, the CFPB states that it “is continuing to engage in additional research and has begun consumer testing initiatives related to the opt-in process.”  Although the Fall 2015 agenda had estimated a January 2016 date for further prerule activities, the new agenda moves that date to August 2016.  In light of the fact that most of the banks subject to CFPB supervisory jurisdiction have changed the order in which they process electronic debits, we believe the CFPB feels less urgency to promulgate a rule prohibiting the use of a high-to-low dollar amount order to process such debits.

Debt collection.  In November 2013, the CFPB issued an Advance Notice of Proposed Rulemaking concerning debt collection.  In the Spring 2016 agenda, as it did in the Fall 2015 agenda, the CFPB states that “it is in the process of analyzing responses to a survey seeking information from consumers about their experiences with debt collectors and is engaged in qualitative testing to determine what information would be useful for consumers to have about debt collection and how that information should be provided to them.”  The agenda estimates that further prerule activities, which are expected to involve the convening of a SBREFA panel, will occur in June 2016.  The CFPB had estimated in its Fall 2015 agenda that further prerule activities would occur in February  2016.

Larger participants.  As it did in its Fall  2015 agenda, the CFPB states in the Spring 2016 agenda that it is considering  “larger participant” rules for “consumer installment loans and vehicle title loans.”  It also repeats the statement in the Fall 2015 agenda that the CFPB is “also considering whether rules to require registration of these or other non-depository lenders would facilitate supervision, as has been suggested to the Bureau by both consumer advocates and industry groups.”  (Pursuant to Dodd-Frank Section 1022, the CFPB is authorized to “prescribe rules regarding registration requirements applicable to a covered person, other than an insured depository institution, insured credit union, or related person.”)  While the prior agenda estimated a September 2016 date for prerule activities, the new agenda estimates a December 2016 date.

Small business lending data.  Dodd-Frank Section 1071 amended the ECOA to require financial institutions to collect and maintain certain data in connection with credit applications made by women- or minority-owned businesses and small businesses.  Such data include the race, sex, and ethnicity of the principal owners of the business.  The Spring 2016 agenda estimates a December 2016 date for prerule activities.  We recently reported that the CFPB had filled the position of Assistant Director for the Office of Small Business Lending Markets.  The CFPB’s job posting indicated that the Assistant Director would head the CFPB’s team involved in developing rules to implement Section 1071.  In the Spring 2016 agenda, the CFPB states that it “will focus on outreach and research to develop its understanding of the players, products, and practices in the small business lending market and of the potential ways to implement section 1071.  The CFPB then expects to begin developing proposed regulations concerning the data to be collected and appropriate procedures, information safeguards, and privacy protections for information-gathering under this section.”

Mortgage rules.  In November 2014, the CFPB issued a proposal to amend various provisions of its mortgage servicing rules.  The Spring 2016 agenda estimates issuance of a final rule in July 2016.  The previous agenda had estimated a June 2016 date.  The new agenda also estimates a September 2016 date for issuance of a proposed interagency rule to implement Dodd-Frank amendments to FIRREA concerning appraisals.  The previous agenda had estimated an April 2016 date.  In April 2016, the CFPB announced its intention to reopen the rulemaking for the TILA/RESPA Integrated Disclosure rule.  At that time, the CFPB indicated that a NPRM would likely be issued in late July and, consistent with that timetable, the Spring 2016 agenda estimates a July 2016 date for a NPRM.

Student Loan Servicing and Consumer Reporting.  As they were in the Fall 2015 agenda, both of these topics continue to be listed as “long-term action” items in the Spring 2016 agenda.

 

High Praise for WSJ Editorial, with a Small Caveat

Posted in Arbitration

A recent editorial in the Wall Street Journal is a “must read” for those who will be affected if the CFPB’s May 5, 2016 proposed rule banning class action waivers in consumer financial services arbitration agreements becomes final. The editorial predicts that the proposed rule will encourage more class actions to be filed against financial services companies, that consumers will be shortchanged by the loss of arbitration, and that the only winners will be the trial lawyers who reap enormous financial benefits from class action settlements. We could not agree more.

Our only quibble is that the editorial states that other researchers “crunched the numbers” in the CFPB’s March 2015 arbitration study to arrive at the conclusion that “the average class member receives a whopping $32 from a settlement.” For the record, we believe that we first crunched those numbers during our March 18, 2015 webinar analyzing the CFPB’s study, and they were featured prominently in the July 13, 2015 comment letter sent by the American Bankers Association, the Consumer Bankers Association and The Financial Services Roundtable to the CFPB on July 13, 2015 for which we served as counsel.

As we have previously noted, the CFPB itself did not do the “long division” in the Study to arrive at the $32.35 number. However, the CFPB’s commentary on the proposed rule now confirms that our math was correct and that on average, putative class members in the settled class actions it studied received “approximately $32 per class member.” (Proposed Rule, p. 73 n. 305).

If you haven’t done so already, please register for our webinar this coming Monday, May 23, where we will address “The CFPB’s Proposed Arbitration Rule: What You Need to Know.” We will discuss, among other things, who and what is covered by the proposed rule, whether existing arbitration agreements will be grandfathered, whether arbitration agreements should continue to be used for individual arbitrations and what you can do to protect your company from the anticipated onslaught of class action litigation. We might even crunch some more numbers.

House Financial Services Committee Scrutinizes Basis of Proposed CFPB Arbitration Rule

Posted in Arbitration, CFPB Rulemaking

On Wednesday May 18, 2016, the House Financial Services Committee’s Subcommittee on Financial Institutions and Consumer Credit held a hearing entitled “Examining the CFPB’s Proposed Rulemaking on Arbitration: Is it in the Public Interest and for the Protection of Consumers?”

The Committee questioned the panel members on whether the CFPB’s proposed rule meets the mandate of Section 1028 of the Dodd-Frank Act. Specifically, under Section 1028, the CFPB has authority to limit the use of consumer arbitration agreements if and only if its study of such agreements establishes that doing so “is in the public interest and for the protection of consumers.”

The panel of speakers included:

  • Professor Jason S. Johnston, Henry L. and Grace Doherty Charitable Foundation Professor of Law, University of Virginia School of Law
  • Dong Hong, VP and Regulatory Counsel, Consumer Bankers Association
  • Andrew Pincus, Partner, Mayer Brown LLP, on behalf of the U.S. Chamber of Commerce
  • Paul Bland Jr., Executive Director, Public Justice

As reported earlier, the CFPB’s proposed rule would prohibit covered providers of certain consumer financial products and services from using pre-dispute arbitration agreements that contain a class action waiver.

In his opening remarks, Congressman Randy Neugebauer (R-TX), who chaired the hearing, stated that the CFPB study “failed to adequately compare outcomes” for consumers between arbitrations and class actions. Chairman Neugebauer further noted that the CFPB’s proposed rule is inconsistent with the CFPB study’s conclusion that arbitrations resulted in substantially quicker claim resolution and significantly greater recovery as compared to class actions, such that the proposed rule constitutes “arbitrary and capricious” agency action that will result in a “justice gap” by removing consumers’ most effective means of redress. Throughout the hearing, the industry representatives stressed, using the CFPB study’s data, that arbitration provides a more convenient vehicle than class actions to vindicate contractual and statutory rights. Implicitly, the testimony questioned whether the CFPB could maintain that its proposed rule was “in the public interest and for the protection of consumers” without further study and data establishing that class actions increase consumer welfare.

As the panel highlighted from the CFPB’s study, arbitration typically concludes within five months, as compared with an average class action lifespan of roughly two years. Arbitration also allowed consumers to pursue their claims in closer proximity to their homes (an average of 15 miles) and, in some cases, remotely by phone or by submitting documents without making an appearance. In addition to procedural convenience and effectiveness, the industry representatives also noted that the study concluded that the average consumer award was multiple times greater than that received by consumers in class actions. The arbitrations studied resulted in consumer awards averaging $5,400, as compared with an average of $32 for consumer class actions that settled. The panelists also pointed out that 60% of class actions produce no benefits at all for consumers and 96% of class members do not recover because they fail to file claim forms.

Additionally, the industry representatives noted that the study established that arbitration allowed consumers to bring disputes without an attorney and thus allowed consumers to avoid the costs and complexity of civil litigation. The study established that consumers were represented by counsel in “roughly 60% of the cases” and that unrepresented consumers achieved outcomes nearly as good as those represented by counsel. While issues were raised concerning the ability of the average consumer to fully understand the arbitration process, the panel was in general agreement that the CFPB had not dedicated a significant amount of resources to educating consumers on how to effectively pursue their rights in arbitration. The panel noted that the arbitration process is widely misunderstood, including that consumers do not know that firms “most often” front a significant portion of the cost. The study was also criticized for being limited to the quantitative aspects of arbitration and thus failing to achieve an informed view of consumers’ actual experiences.

Despite being the “most extensive” study to date, the CFPB’s study was criticized for its lack of detail and its small data set. The overwhelming theme of the hearing was that, even if the study data did not establish that arbitration was more protective of consumer interests than class actions, the only conclusion that the CFPB can draw is that more comprehensive study is needed. Professor Johnston, who has conducted an independent study of class actions and arbitrations, concluded that the CFPB was essentially using “one data point”—a credit reporting class action settlement—as the basis for its far-reaching proposed rule. He noted specifically that this settlement did not result in a monetary award to consumers. Instead, this “one data point” only secured the class six months of credit monitoring and free credit reports (the Fair Credit Reporting Act already provides that consumers may obtain a free credit report each year). Additionally, not one of the class actions identified in the study was litigated through to a jury trial. Professor Johnston concluded at the hearing that the “evidence [the CFPB] found does not justify what they did.” In making his report available to the public, Professor Johnston noted that “owing to flaws in the report’s design and a lack of information, the report should not be used as the basis for any legislative or regulatory proposal to limit the use of consumer arbitration.” Mr. Hong concurred, stating that the CFPB’s proposal was “aggressive,” “inconsistent with the study findings,” and that industry’s attempted dialogue with the CFPB about its flawed study “has not led to any results.”

The study was also criticized for only covering a small time frame—from 2008 to 2012. As Mr. Hong emphasized, the majority of the study covered a period before the CFPB became active in late July, 2011. As a result, the study failed to capture the effectiveness of CFPB enforcement actions to displace the need for the blunt vehicle of consumer class actions. Professor Johnston agreed, noting that the CFPB can make “calibrated” enforcement decisions that eliminate the need for its proposed rule. Mr. Pincus added that the CFPB study only represents the “tip of the iceberg” in demonstrating the effectiveness of arbitration because the data did not capture all privately resolved claims. In turn, the panel members criticized the study for wallpapering over this lack of data. In making crucial conclusions about the consumer costs of the proposed rule, the study self-servingly states, without citation and without underlying data, that “economic theory suggests” its rule would not adversely affect consumers through increased costs.

The panel expressed that rulemaking based upon unsupported and generalized claims about “economic theory” is especially risky because of potential unintended consequences. In particular, the industry representatives expressed that economic realities would not allow firms to maintain dual methods of complaint resolution. Effectively, the ability of consumers to bring class actions would cause firms to cease offering arbitration as a means to resolve claims and, therefore, close off a consumer’s most effective means of redress. This is especially harmful to low income consumers that have “individualized” claims that are not appropriate for resolution under the class action vehicle. Instead of arbitration providing a means of redress for small claims, in order to present their cases in court, consumers would be required to obtain representation and pay, out of pocket, legal fees that would eclipse the value of claims several times over. The industry representatives also noted that the firms subject to the rule were regulated by prudential regulators. Comprehensive “safety and soundness” review requires meaningful assessment of firms’ litigation exposure. A class action arbitration waiver ban may require firms to “lock-out” capital to cover the increased exposure. This capital “lock-out” would decrease the amount of capital available for consumer lending and therefore, create lending on less favorable terms than under a competing arbitration regime. The panel was in general agreement that the increased costs associated with class action litigation would be passed on to consumers in the form of increased costs of financial goods and services.

Several Congressional representatives and Mr. Bland praised the proposed rule, arguing that without the class action arbitration ban, consumers would be left with no remedy at all for small claims. Though disagreeing, industry representatives also responded by pointing out that in its zeal for instituting a class action arbitration ban, the CFPB had not researched or considered whether it could improve any identified inefficiencies of the current arbitration system without de facto banning its use. One panel member, Mr. Pincus, noted that the “flawed study” did not include any requests for public comment and that the effect of this insular process was to produce “preordained results.” He proffered that the CFPB had overlooked the elephant in the room: “Is there a way to make arbitration more useful than it is?” He noted that the CFPB could consider rules regarding incentives within the current arbitration system—a system that has been repeatedly upheld and strengthened by the Supreme Court within the past 15 years—by altering incentives. The CFPB could consider rules incentivizing attorneys to bring arbitration claims with fee awards or, as an alternative, consider rules that would penalize companies for not settling meritorious claims with consumers.