Before today you may have thought the Supreme Court was the highest court in the land. You would be wrong.
You may also have thought that legislation is passed by Congress and signed into law by the President. Wrong again.
Welcome to the age of the Consumer Financial Protection Bureau. The CFPB is run by one man, Richard Cordray. Mr. Cordray was appointed as the Director of the CFPB by President Obama. It was a recess appointment. Mr. Cordray answers to no one, as a practical matter. He calls the shots at the CFPB, and he can only be removed for cause. Unless he's running CFPB email through a private server in his basement, his reign is safe.
Reminiscent of the Ministry of Truth, the CFPB continues to wreck havoc on consumers. Its latest assault is a proposed rule outlawing arbitration clauses that prohibit class action lawsuits in certain consumer finance agreements. At first blush this seems like a big win for consumers. If the proposed rule becomes final, consumers can bring class action lawsuits against credit card companies, banks, mortgage companies, and other financial institutions.
Before we look at the harm this rule would cause consumers, let's put arbitrations in perspective.
A Brief History of Arbitrations
The right of parties to arbitrate disputes is protected by federal law. The Federal Arbitration Act was signed into law in 1925. It provides, among other things, that agreements to arbitrate disputes are enforceable. Beginning at least in the 1990's, arbitration clauses were used to defeat class action lawsuits. Where the parties had agreed to arbitrate disputes, claims could still be brought, but they must be brought on an individual basis in arbitration.
The Supreme Court upheld the enforcement of arbitration clauses that defeat class action lawsuits. For example, in AT&T Mobility v. Concepcion, 563 U.S. 333 (2011), the Supreme Court upheld the use of arbitration clauses that preempt class action lawsuits. The facts of this case are instructive.
In 2002 the Concepcions purchased
The Concepcions agreement with AT&T included an arbitration clause. This clause provided, among other things:
- Customers may initiate dispute proceedings by completing a one-page Notice of Dispute form available on AT&T’s Web site.
- AT&T may then offer to settle the claim; if it does not, or if the dispute is not resolved within 30 days, the customer may invoke arbitration by filing a separate Demand for Arbitration, also available on AT&T’s Web site.
- In the event the parties proceed to arbitration, the agreement specifies that AT&T must pay all costs for nonfrivolous claims.
- That arbitration must take place in the county in which the customer is billed.
- That, for claims of $10,000 or less, the customer may choose whether the arbitration proceeds in person, by telephone, or based only on submissions.
- That either party may bring a claim in small claims court in lieu of arbitration.
- That the arbitrator may award any form of individual relief, including injunctions and presumably punitive damages.
- The agreement, moreover, denies AT&T any ability to seek reimbursement of its attorney’s fees, and, in the event that a customer receives an arbitration award greater than AT&T’s last written settlement offer, requires AT&T to pay a $7,500
minimum recovery and twice the amount of the claimant’s attorney’s fees.
AT&T sought to enforce this arbitration agreement. The Concepcions responded that the agreement was unconscionable and unlawful under California law. The trial and appellate courts sided with the Concepcions. The Supreme Court reversed.
Enter The CFPB
The CFPB's proposed rule thumbs its nose at the Federal Arbitration Act and Supreme Court precedent. With the stroke of a single pen by one person, the CFPB seeks to replace arbitration agreements with class action lawsuits. In so doing, consumers will be harmed in several ways.
First, the driver behind many class action lawsuits is the attorney, not the plaintiff. One wonders if that was the case with the Concepcions. Who brings a claim for $30.22 four years after a purchase on the spurious grounds that paying state mandated sales tax for a free phone means the phone wasn't free?
The result of the CFPB's proposed action will be an onslaught of frivolous class action lawsuits in the finance industry by lawyers seeking a big payday. Some lawsuits will of course have merit, but many will not.
The Uber settlement, although not finance related, is a case in point. The lawsuit was brought claiming that drivers were employees, not independent contractors. Given that drivers use their own vehicles, work where the want, when they want, and as much as they want, the merits of the case were dubious at best. Not surprisingly, plaintiffs' counsel agreed to a settlement that completely abandoned the claim that drivers were employees, while counsel is set to pocket $25 million.
Second, the costs associated with class action lawsuits will surely go into the billions. These costs will in part lower the profits of financial institutions. They will also likely result in higher interest rates for borrowers, lower interest rates for savers, and higher fees for all.
Third, class action lawsuits are notorious for providing plaintiffs little if any benefit. Consumers receive a coupon while the lawyers rake in millions. I've personally received countless notices of class settlements, which I dutifully recycle.
There's no question that the CFPB's proposed rule has some benefits to consumers. Class actions, in their perfect form, enable large groups of plaintiffs to pursue valid claims that, standing alone, would be too small to justify a lawsuit or arbitration. But it's equally clear that the costs associated with class action lawsuits will ultimately harm consumers through higher interest rates, higher fees, and diminished access to credit.
These costs and benefits should be the subject of honest, open debate. Instead, one man appointed when the Senate was in recess, who can only be removed for cause, decides for everybody.
George Orwell couldn't have written a more sinister plot.
