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07/19/2018

CFPB’S Arbitration Rule Under Scrutiny in Report from Cause of Action Institute

Washington, DC – July 19, 2018 – Cause of Action Institute (CoA Institute) today released a report on the failure of the Consumer Financial Protection Bureau (CFPB) to conduct a proper study on its arbitration rule, which banned certain corporations from using pre-dispute arbitration clauses in their consumer credit contracts. CoA Institute Case Study on the CFPB’s Arbitration Rule: How the Bureau Evaded Scientific Guidelines and Bypassed Peer Review—And How to Fix It examines the failings of the arbitration study and offers solutions to ensure future policy is informed by sound science.

The rule was overturned by Congress and President Trump in February of 2018, but lasting change is needed to CFPB’s analytical approach to prevent future rules from being based on weak science. President Trump nominated Kathy Kraninger as the new potential CFPB director and, just today, July 19, she had her nomination hearing. If confirmed, she needs to immediately take steps to ensure that the CFPB follows the law when conduct future studies and promulgating rules.

CoA Institute attorney Eric R. Bolinder said, “The CFPB not only had to adhere to the orders of Congress in Dodd-Frank to do the study, it was also required to follow the Information Quality Act and Office of Management and Budget guidelines on peer review. The Bureau ignored both. Accountability is needed to keep this too-powerful agency in check.”

As CoA Institute’s report explains:

In the Dodd-Frank Act, Congress delegated to the CFPB the power to study and regulate, if necessary, mandatory-binding arbitration clauses in consumer financial contracts. This power came with an important caveat: the CFPB must first conduct a study on the effect arbitration clauses have on consumers, and any regulation promulgated by the agency must be based on that study. The CFPB already had the goal in mind to regulate and ban these arbitration clauses, driven largely by internal bias and promoted by third-party interests. Instead of conducting an objective study backed by peer-reviewed data, the agency sought a pre-determined result, abusing junk science and methodology to get there.

See the report and more about this issue here.

For any media inquiries, contact media@causeofaction.org.

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07/19/2018

CoA Institute Case Study on the CFPB’s Arbitration Rule: How the Bureau Evaded Scientific Guidelines and Bypassed Peer Review—And How to Fix It

 

Executive Summary

The Consumer Financial Protection Bureau (“CFPB” or “Bureau”) is an agency unlike most any other in the history of the United States.  It possesses untold power over the American people and businesses, and the heft of this power is in a single agency director accountable to no one.  As Judge Kavanaugh of the U.S. Court of Appeals for the D.C. Circuit held in a since-vacated decision, “the Director enjoys more unilateral authority than any other officer in any of the three branches of the U.S. Government, other than the President.”[1]

In the Dodd-Frank Act of 2010, Congress delegated to the CFPB the power to regulate, if necessary, mandatory-binding arbitration clauses in consumer financial contracts.  This power came with an important caveat: the CFPB must first conduct a study on the effect arbitration clauses have on consumers, and any regulation promulgated by the agency must be based on that study.  Yet the CFPB already had the goal in mind to regulate and ban these arbitration clauses, driven largely by internal bias and promoted by third-party interests.  Instead of conducting an objective study backed by peer review, the agency sought a pre-determined result, abusing junk science and methodology to get there.  In doing so, it ignored the requirements of the Information Quality Act (“IQA”) and the ensuing Office of Management and Budget (“OMB”) bulletin requiring agency peer review.  This paper examines the failings of the arbitration study and offers solutions to the potential new agency head to ensure future policy is informed by sound science.

Recommendations

The best way to curtail the CFPB’s abuse of junk science is to force the agency to follow the standards contained within the IQA and the OMB peer review bulletin.  If the CFPB were to strictly adhere to the IQA’s standards of data quality—objectivity, integrity, and utility—and conduct rigorous, academic peer review, outcomes like the one detailed in this paper would be avoided.

Cause of Action Institute (“CoA Institute”) recommends that the new CFPB Director, once confirmed, immediately institute rulemaking actions to codify these already-mandatory requirements of the IQA and peer review.  This should apply to all studies or scientific findings released by the agency, whether they undergird a rule or not.[2]  Although the Director could just order agency personnel to follow these directives through a memorandum, that would only be a temporary solution.  Rulemaking under the Administrative Procedure Act (“APA”) would ensure that these science-based requirements have more permanence and apply regardless of who is running the agency five years from now.[3]  Furthermore, the new Director should require, whether through rulemaking or otherwise, that all published scientific findings be accompanied by full disclosure of outside datasets, sources, and lobbying.

Eric Bolinder is Counsel at Cause of Action Institute

[1] PHH Corp. v. Consumer Fin. Prot. Bureau, 839 F.3d 1, 7 (D.C. Cir. 2016), vacated on reh’g en banc, 881 F.3d 75 (D.C. Cir. 2018); see Consumer Fin. Prot. Bureau v. RD Legal Funding, LLC, No. 17-890, 2018 WL 3094916, at *35 (S.D.N.Y. June 21, 2018) (“Respectfully, the Court disagrees with the holding of the en banc court and instead adopts Sections I-IV of Judge Brett Kavanaugh’s dissent[.]”).
[2] This, of course, would extend to any scientific findings that are part of a proposed rule.
[3] A future Director could institute rulemaking to reverse the requirements, but that is a cumbersome process subject to judicial review.

 

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07/14/2017

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.

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