CFPB’s Unconstitutional Assault on Private Business Harms Consumers

in Economics/Politics

Under the Consumer Financial Protection Bureau’s (CFPB) new rule, private companies would be banned from fully utilizing mandatory arbitration clauses. Pertaining mainly to financial products such as credit cards and bank accounts, these clauses currently prevent consumers from joining together in class action lawsuits to sue their banks.

While the rule wouldn’t ban these clauses from company contracts entirely, it would prevent them from being used to stop group action.

Aside from representing a blatant government intrusion in private businesses, this could seem like a good thing at face value. Consumers would be free to utilize further legal options, however, the data suggests that using those options would be against the consumer’s financial interests.

Mandatory Arbitration clauses represent a low-cost venue for consumers to address disputes with financial institutions, and give vastly higher payouts. According to the CFPB’s own 2015 study, the average consumer yield for arbitration is $5000, while the average class action lawsuit yields only $32.

If consumers are paid more with arbitration, why would financial institutions want to keep these clauses anyway? As in most legal matters, the answer lies with attorneys. Attorneys earn a whopping $424,000 from the average class action lawsuit, making the CFPB rule an enormous boon for class action lawyers.

Proponents of the CFPB rule argue that it restores the “right” of consumers to pursue joint justice through class action lawsuits. CFPB Director Richard Cordray recently stated, “These clauses allow companies to avoid accountability by blocking group lawsuits and forcing people to go it alone or give up. Our new rule will stop companies from sidestepping the courts and ensure that people who are harmed together can take action together.”

The CFPB is engaging in serious overreach. The beauty of the free market system is that consumers can choose who to do business with. If one financial institution won’t allow class action lawsuits, there are plenty of other institutions out there.

Rep. Jeb Hensarling (R-TX) even accused Director Cordray of allowing his “personal political ambitions” to shape the CFPB rule in a letter on August, 28th. Many lobbyists expect Cordray to soon begin a run for Governor in Ohio, and the rule would tremendously benefit class action lawyers.

Of course, the CFPB is of dubious constitutionality in and of itself. In October of 2016, the bureau’s structure was declared unconstitutional in a landmark court case. PHH Corp, a mortgage company, received a $100 million fine from the CFPB, claiming illegal kickbacks. PHH challenged the CFPB, and the court unanimously handed them a victory.

Created by the 2010 Dodd-Frank financial regulations, the CFPB is unaccountable to Congress or the President. Sidestepping Congress’ “power of the purse,” the CFPB receives funds directly from the Federal Reserve, and is controlled solely by Director Cordray. The CFPB exercises broad powers to regulate financial institutions, such as small businesses, banks, and money lenders.

Fortunately, in July, House Republicans exercised their votes to curb the power of the CFPB by passing a repeal of the CFPB rule under the Congressional Review Act. In order to bring the CFPB’s unconstitutional actions to heel, Senate Republicans shouldn’t delay in doing the same.