Patrick McHenryChairman

Washington, May 18, 2016 -

WASHINGTON – A proposed regulation requiring financial companies to scrap arbitration contracts will lead to higher costs for consumers and less access to credit and new products, witnesses told members of the Subcommittee on Financial Institutions and Consumer Credit on Wednesday.

The rule proposed by the Bureau of Consumer Financial Protection – perhaps the most powerful and least accountable agency in the federal government – will leave consumers worse off as businesses pass the costs of more lawsuits on to customers and divert resources away from new products and services.

The Bureau’s own May 2015 study on arbitration demonstrates more favorable outcomes for consumers using arbitration as compared to class actions, said Rep. Randy Neugebauer (R-TX), Chairman of the Subcommittee.

“For example, arbitration produces a significantly higher recovery for individual consumers and has a shorter resolution timeline for recovery.  In testimony before this Committee, the agency has stated that banning the use of class action waivers in arbitration agreements, the main provision in the Bureau’s rule, would achieve a primary Bureau objective – ‘to give consumers their day in court.’  Nothing could be further from the truth,” said Chairman Neugebauer.  “I fear a single, unelected bureaucrat has directed agency action that is arbitrary and capricious.  The Bureau has failed to articulate a rational connection between the facts found in its May 2015 study and the agency action before us today.”

Key Takeaways from the Hearing:

• The Bureau’s study is incomplete and notable for what it ignored, namely a meaningful comparison of how consumers fare in arbitration versus class actions, an examination of arbitration settlements, or an evaluation of reasonable proposals to address the Bureau’s perceived shortcomings with arbitration as a means of resolving consumer disputes.

• The Bureau’s quest to prohibit arbitration is not in the best interest of consumers, but it is no doubt a windfall for trial lawyers.  Even the Bureau’s own flawed study shows that in the just 13 percent of class actions that actually provided a benefit to consumers, the average payout was roughly $32.  Plaintiff lawyers make about 31,000 times that amount, earning an average of $1 million per settled case.

• According to the Bureau’s own study, consumers are more likely to obtain decisions on the merits in arbitration than they are in class actions, which rarely, if ever, go to trial before a settlement is reached. In fact, the Bureau’s own study relied on data where not a single case resulted in a bench or jury trial.

• Arbitration is far more expedient for consumers. The Bureau’s own study concludes that arbitration is up to 12 times faster than litigation. Further, the cost barrier to file a complaint under arbitration is roughly half of what it costs to file a new complaint in federal court. Most importantly, consumers who obtain relief in arbitration recover an average of $5,389 contrasted to the $32.35 average class member recovery.

Topline Quotes from Witnesses:

“Due in part to consumers paying little to nothing for arbitration proceedings, they recover significantly higher sums than they do through class actions -- $5,389 vs. $32.35 average recovery. In contrast, litigation can be complicated, time-consuming and requires a lawyer to navigate the process. In addition, many consumer claims may be too small to attract contingency fee lawyers” –Dong Hong, Vice President, Regulatory Counsel, Consumer Bankers Association

“The CFPB finding that is entirely out of line with my own ongoing research is that attorney fees are only 21 percent of the aggregate payment to the class. In class settlements under federal consumer protection statutes that I have studied, attorney fees are rarely less than 75 percent of the total amount paid to the class and often are equal to three or four times that amount paid to the class. This finding indicates that class action settlements are an extremely costly and inefficient way of getting money to class members. To see how inefficient, one needs only to ask the question: ‘Who would pay their lawyer three times the amount that they themselves actually recovered?’” –Jason Scott Johnston, Henry L. and Grace Doherty Charitable Foundation Professor, University of Virginia Law School

“The CFPB’s study tried to provide that businesses do not pass on cost savings from arbitration to consumers and employees, but that attempt was unpersuasive.  As the academics who reviewed the CFPB’s study concluded, the CFPB’s findings on this point were plagued by ‘theoretical problems’ and ‘technical failures,’ and they fly in the face of ‘[b]asic economic theory,’ which ‘predicts that competition forces firms to pass on to consumers [or employees] at least a portion of any cost decrease.” -Andrew Pincus on behalf of the U.S. Chamber of Commerce

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