CoA Institute Applauds Senate Vote to Kill Harmful CFPB Arbitration Rule

Washington, DC – Cause of Action Institute (“CoA Institute”) today commended a Senate vote to kill a rule by the Consumer Financial Protection Bureau (“CFPB”) that would have banned arbitration clauses in consumer contracts for financial products. Vice President Mike Pence cast the tie-breaking vote to reject the rule under the Congressional Review Act. CoA Institute has led the charge in showing that CFPB failed to adequately justify its arbitration rule, which would increase costs on consumers.

CoA Institute Counsel Eric R. Bolinder: “The Senate last evening took a strong stand in rejecting a CFPB rule that would enrich class action attorneys at the expense of the American economy and consumers. This rule was based on a flawed scientific study that used junk data and methodology, contrary to the requirements of Dodd-Frank and the Information Quality Act. Government rules, especially those that have broad effects on consumers and business, must be based on sound science.”

In 2000, Congress passed the Information Quality Act to ensure that agencies use quality data in rulemaking, ensuring the objectivity, integrity, and utility of agency methodology. The Office of Management and Budget subsequently issued its own guidance that calls for agencies to have other experts and scientists verify their work through a rigorous peer-review process.

In March 2015, CFPB released a 728-page report, which was not peer reviewed, purporting to show how class action lawsuits benefit consumers. The report, when looked at through an objective eye, arguably demonstrated the opposite. Class action lawsuits can often result in a worse outcome for consumers than individual arbitration, which is a quicker and more efficient process for settling disputes.

In April 2016, CoA Institute filed a Freedom of Information Act request for records that would show how the agency conducted its study. Although CFPB produced some documents, it withheld 1,877 pages of responsive records. In December, 2016, CoA Institute filed a lawsuit to compel the CFPB to provide all responsive records not covered under a valid exemption.

In August 2016, CoA Institute filed a regulatory comment highlighting key problems with the arbitration rule. The comment outlines how the rule would subject numerous financial institutions to a flood of class action lawsuits, further burdening the courts and ultimately injuring consumers.  CFPB responded to CoA Institute’s comment, providing a woefully inadequate defense of its rule.  CoA Institute also submitted written testimony for the record to Congress.

For information regarding this press release, please contact Zachary Kurz, Director of Communications at CoA Institute:


CFPB’s Woeful Defense of its Final Arbitration Rule

The Consumer Financial Protection Bureau (“CFPB”) has taken steps to finalize its long-awaited disaster of a rule that would ban certain arbitration clauses in consumer finance contracts. This will severely harm economic liberty and cause banks to shift excess costs on to consumers, apparently all to benefit an elite group of plaintiffs’ lawyers eager to file massive class actions and pocket huge attorneys’ fees.

Cause of Action Institute (“CoA Institute”) has written extensively on this, including submitting a regulatory comment during the rule’s open period. In its final rule, CFPB responded to CoA Institute’s comments directly. For example, we detailed precisely how CFPB ignored the requirements of the Information Quality Act (“IQA”), which requires that agencies disseminate only “quality” information that meets Office of Management and Budget (“OMB”) defined standards of “objectivity, utility, and integrity.”  Furthermore, we alleged that CFPB failed to conduct a peer review of the study, as required by OMB.  In its final rule, CFPB writes:

One nonprofit commenter challenged the Bureau’s Study for its alleged failure to comply with the requirements of the Information Quality Act and a related OMB bulletin, asserting that the Study should have undergone a rigorous, transparent peer review process to ensure the quality of the disseminated information.

CFPB’s answer to our comment is vapid and incomplete:

In response to concerns about the Bureau’s compliance with the Information Quality Act, the Bureau did comply with the IQA’s standards for quality, utility, and integrity under the IQA Guidelines.

The footnote CFPB placed at the end of this sentence, which one assumes would support the Bureau’s assertion, merely links to the agency’s IQA guidelines website. CFPB makes no effort to answer CoA’s detailed criticisms or explain why the Bureau’s study met objectivity, utility, and integrity standards.  One is left to draw the inference that CFPB simply has no defense for the glaring vulnerabilities in the Arbitration Study.  The Bureau’s only play is to blindly link to IQA guidelines and hope we take their word for it.

CFPB put similarly little effort into responding to our allegations regarding peer review.

Moreover, the Study did not fall within the requirements of the OMB’s bulletin on peer review, contrary to what the commenter suggested. The bulletin applies to scientific information, not the “financial” or “statistical” information contained in the Study. The Federal financial regulators, including the Bureau, have consistently stated that the information they produce is not subject to the bulletin.

In our initial comment, CoA Institute anticipated CFPB might make this argument:

CFPB may be claiming [an exemption from the peer review rules] under the authority of Section IX of the OMB Peer Review Bulletin, which finds that “accounting, budget, actuarial, and financial information, including that which is generated or used by agencies that focus on interest rates, banking, currency, securities, commodities, futures, or taxes[]” are exempt from peer review. However, neither the Arbitration Study nor the proposed regulations fall under any of these categories. It is a social and behavioral study—concentrating not only on award numbers, but also consumer preference and awareness.

Essentially, the CFPB appears to be playing games of semantics, differentiating “financial” information from “scientific” information. As anyone who has a degree in economics knows—such as this author—it is very much a science.  The agency cannot be allowed to wriggle out of an important peer-review requirement by simply stretching dictionary definitions.

Furthermore, even if CFPB were not required to conduct a peer review, why wouldn’t they? If the CFPB is as confident in its results as it seems to be, why not bolster the study’s integrity by having outside academics go through the very routine peer review process?  This lends credence to the idea that this study was rigged from day one to get to a pre-determined result: arbitration is bad.

CFPB attempted to sow confusion regarding what peer review is and how it is conducted:

Although the Bureau did not engage in formal peer review, it did include with its report detailed descriptions of its methodology for assembling the data sets and its methodology for analyzing and coding the data so that the Study could be replicated by outside parties. The Bureau is not aware of any entity that has attempted to replicate elements of the Study; to the extent that the Bureau’s analysis has been reviewed by academics and stakeholders those individual critiques are addressed above. The Bureau has monitored academic commentary in addition to the comments submitted and continues to do so.

This is not an adequate substitute for the OMB required peer review. CFPB appears to be shifting the blame on outside groups for not “replicating” the study.  This is something the agency could have and should have coordinated on its own.

CFPB appears to know its study has glaring weaknesses that threaten the integrity of its final rule. Remember, Dodd-Frank requires that any arbitration rule be “consistent” with the underlying study. If the study is bad, so is the rule.

This rule threatens economic freedom and is based on a rigged study that used junk data and methodology. Whether through litigation, legislation, or a new rulemaking, it must go.

CoA Institute Sues CFPB for Refusing to Release Records Underpinning Anti-Arbitration Rule

Washington D.C. – Cause of Action Institute (“CoA Institute”) today filed a lawsuit in the U.S. District Court for the District of Columbia to compel the Consumer Financial Protection Bureau (“CFPB”) to provide records the agency used in formulating its rule to prohibit the use of mandatory binding arbitration clauses in financial services contracts.

Cause of Action Institute Vice President John Vecchione: “To issue a regulation affecting such a vast swath of the economy, and then attempt to conceal the bulk of the documents reflecting how that decision was made from public view, violates the law and the American people’s right to know.”

Prohibiting the use of third-party arbitration in financial contracts would subject numerous financial institutions to a flood of class action lawsuits, further burdening the courts and ultimately injuring consumers by increasing the costs associated with bank loans and other financial services. The CFPB’s proposed rule was largely based on a study commissioned by the agency in 2015. 

In April 2016, CoA Institute filed a Freedom of Information Act (“FOIA”) request for records that would show how the agency conducted its study. Although CFPB produced some documents, the agency withheld a large number of responsive records and information. 

In September, 2016, CFPB issued a final determination, indicating the agency would withhold 1,877 pages of responsive records. CoA Institute appealed the CFPB’s determination and challenged each FOIA exemption the agency applied to the production. Last month, CFPB denied the appeal.

In its lawsuit, CoA Institute argues that CFPB is required to produce all responsive records not covered by a valid exemption.  The burden is on the agency to justify the use of any exemption to withhold or redact information, which CFPB has failed to do. The lawsuit compels the agency to produce all records improperly withheld within twenty business days of the court’s order.

The full lawsuit can be found here