Treasury Faults Arbitration Rule

Aimed at Protecting Consumers

Mills/The New York Times
Image
Steven Mnuchin, the secretary of the Treasury, which said the Consumer Financial
Protection Bureau’s effort to rein in arbitration clauses could drive up the cost of
credit.CreditCreditDoug Mills/The New York Times
By Jessica Silver-Greenberg

The Treasury Department took aim on Monday at a rule that would allow millions of
Americans to band together in class action lawsuits against Wall Street firms, saying it
could trigger frivolous lawsuits and drive up the cost of credit.

In an 18-page report, the department said the Consumer Financial Protection Bureau,
which adopted the rule this summer, did not adequately evaluate the harm it could
cause to consumers.

The report arrived amid a broader push by the Trump administration to relax or repeal
regulations, including those that affect financial institutions. Treasury has published
two reports recommending a series of changes to financial rules put in place after the
2008 financial crisis.

The arbitration rule, which is set to take effect in 2019, will prevent credit card
companies and other financial institutions from using the fine print of contracts to ban
class action lawsuits or force consumers into arbitration, a private system where an
individual has to go up alone against a deep-pocketed corporation.
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Treasury said the rule could deal an expensive blow to financial institutions, costing
them more than $500 million in legal defense fees. The real winner, the report says, are
class action lawyers. At its center, the report questions the very analysis the consumer
agency used to create its signature rule.

“The bureau failed to meaningfully evaluate whether prohibiting mandatory arbitration

clauses in consumer financial contracts would serve either consumer protection or the
public interest,” the report said.

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The rule does not explicitly ban mandatory arbitration. Still, critics of the rule say it will
effectively kill mandatory arbitration.
“The report by the Treasury Department rehashes industry arguments that were
analyzed in depth and solidly refuted in the final rule,” said Samuel Gilford, a
spokesman for Consumer Financial Protection Bureau. He added that the bureau’s
analysis “found that mandatory arbitration clauses allow companies to avoid
accountability for breaking the law and cost consumers billions of dollars by blocking
group lawsuits.”

Across the country, judges, prosecutors and some regulators have forcefully echoed
those complaints, faulting arbitration clauses for enabling corporations to opt out of the
court system and depriving Americans of one of the few ways to fight abusive business
practices.
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Some Democrats revived those arguments on Monday. “With this report, the Trump
administration has twisted itself into a pretzel to try to undermine a rule that protects
consumers from unscrupulous actors like Equifax and Wells Fargo,” said Senator Chuck
Schumer of New York, the Democratic leader.
Richard Cordray, the head of the Consumer Financial Protection Bureau, whose
arbitration rule is set to take effect in 2019.CreditAndrew Mangum for The New York
Times
Image

Richard Cordray, the head of the Consumer Financial Protection Bureau, whose
arbitration rule is set to take effect in 2019.CreditAndrew Mangum for The New York
Times
Even in a deeply divided Washington, the move by the Treasury Department and its
head, Steven Mnuchin, was exceptional: It publicly pits two federal agencies against
each other.

It was not the first dust-up between them. In June, the Treasury Department issued a
report recommending that the bureau be reined in, accusing it of overreach and calling
for President Trump to be able to remove its director. The bureau is led by Richard
Cordray, whom President Barack Obama tapped to lead the nascent agency.

The arbitration rule roiled Washington from the start. Keith A. Noreika, the acting
comptroller of the currency, asked Mr. Cordray to delay publication of the rule, arguing
that his own staff needed more time to review whether it posted a threat to the safety
and soundness of the banks — an idea Mr. Cordray called “plainly frivolous.”

The friction speaks to a broader division. As many federal agencies have begun to scale
back the regulations on companies, the agency, born of the 2010 Dodd-Frank financial
law, has taken a different tack. Since Mr. Trump took office, the bureau has unfurled a
number of new rules and boldly enforced existing ones.

The arbitration rule stems from concerns about the growing prevalence of financial
contracts stipulating their use. As arbitration crept into tens of millions contracts, it was
increasingly tough to apply for a credit card or rent a car without agreeing to arbitration.
The consumer agency was specifically mandated to examine arbitration.
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That analysis culminated in a 728-page report, released in March 2015, that found that
once people were prevented from joining together in a class action, most just abandoned
their claims. Those who did go forward, the agency found, did not always fare well. In
the roughly two-year period examined, only 78 arbitration claims resulted in judgments
in favor of consumers.

The financial industry disputed those findings, arguing that, on an individual basis,
consumers wound up with more money in arbitration than in class actions.

But judges, including some appointed by conservative presidents, say focusing on the
amount of money is a distraction. Class actions, they argue, are intended to help big
groups of people get back small amounts of money — say a $35 overdraft fee. Class
actions can push companies to get rid of questionable business practices.

While the Treasury report questions the bureau’s analysis, it does not call for the rule to
be overturned. Still, it could strengthen attempts by the Senate to overturn the rule.
While an effort to repeal the rule passed the House, it stalled in the Senate.

Behind the scenes, lawmakers who have been struggling to drum up support for
overturning a rule that could have wide populist appeal are hoping to call a vote as early
as this week, according to a person familiar with the matter. An earlier attempt to pull
together votes stalled, the person said.
Also frustrating their attempts is a recent spate of corporate scandals involving Wells
Fargo and Equifax that Senate Democrats have seized on to emphasize the importance
of the new rule. Equifax, which disclosed that a major data breach had potentially
compromised the personal data of more than 143 million Americans, was particularly
poignant. In the wake of the attack, the company initially included a mandatory
arbitration clause in the fine print of free credit monitoring product.