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CFPB Rips Treasury Arbitration Report As Senate Kills Arbitration Rule

The Consumer Financial Protection Bureau said Tuesday that a U.S. Department of the Treasury review misinterpreted the research the bureau used to justify its rule prohibiting class action bans in arbitration agreements, ripping the Treasury Arbitration Report, just hours before the U.S. Senate voted to overturn the rule.

In a letter to Treasury Secretary Steven Mnuchin, CFPB Director Richard Cordray questioned why the Treasury Department waited until late October to voice its concerns about the bureau’s rule rather than prior to the rule’s release in July.

Cordray noted that the Treasury did not raise concerns about the rule when the CFPB sought consultations about it on three separate occasions — including once prior to the July finalization after Mnuchin was confirmed to lead the department.

“Throughout the two years of the rulemaking process, the bureau consulted repeatedly with staff representatives from the prudential regulators and Treasury Department. Over that period, the Treasury Department raised no issues or concerns with the bureau,” Cordray’s letter said.

But the Treasury did raise concerns Monday in a review it released ahead of a Senate vote to overturn the rule. Following the lead of the Office of the Comptroller of the Currency, the department’s review raised concerns that the rule would lead to higher costs for consumers and that the study the bureau used to justify its regulation was shoddy.

The regulation would have barred banks and other consumer financial firms from putting in clauses that stop consumers from joining together in class action litigation. The CFPB justified its rule through a 2015 study that found that arbitration clauses kept consumers from getting access to courts and redress for perceived wrongs.

While the rule inspired the expected outrage from the financial services industry and the U.S. Chamber of Commerce, it drew unexpected heat from fellow regulators.

The Office of the Comptroller of the Currency, led by acting Comptroller Keith Noreika, has gone hard after the rule. The OCC has released a report condemning the CFPB’s 2015 study on arbitration that it used to justify the rule, and Noreika has published an op-ed blasting the regulation.

The Treasury Department followed suit Monday with its own review. The Treasury review cited the OCC’s report and added its own concerns about the CFPB’s look at the potential costs of litigation.

In particular, the Treasury found that the CFPB undercounted the amount of litigation that the new rule would produce should it be allowed to take effect by not including state court litigation that would come about. The CFPB had predicted that the rule would lead to an additional 3,000 class action complaints each year, leading firms to pay $500 million in additional legal defense fees, $330 million in payments to plaintiffs’ lawyers and $1.7 billion in additional settlements, without including state court lawsuits.

In return, consumers could expect to receive an average of $32.35 each, with only 4 percent of people eligible for class action claims actually requesting one, the Treasury said.

But a memorandum prepared by CFPB staff and sent to the Treasury on Tuesday rejected those findings.

The CFPB memorandum noted that most class actions with a potential for $5 million or more in claims would most likely be remanded to federal court, and the arbitration rule said it expected to see a rise in state court settlements despite limitations on data related to state court proceedings.

The CFPB also said the Treasury grossly overstated attorneys’ fees related to class action litigation, noting that “simple division establishes that, for every $32 paid to consumers on average, only about $10 is paid to their lawyers.”

The Treasury’s review also said that only 4 percent of individuals eligible for settlements put in claims. But the CFPB noted that many consumer class actions provide for automatic claims, and the bureau’s research found that 24 million consumers received $709 million in payments automatically over a five-year period without making claims.

“In short, Treasury’s report ignores large parts of the rule — which address the very issues Treasury raises — and misunderstands much of the underlying data,” the CFPB memorandum said.

But the last volley in the rare back-and-forth between regulators came just hours before the Senate voted to nullify the CFPB’s rule.

The Senate voted 51-50 to approve a measure under the Congressional Review Act to eliminate the CFPB’s arbitration rule, with Vice President Mike Pence breaking a 50-50 tie.

That 1996 law allows lawmakers to nullify a rule with a simple majority vote in both houses of Congress. The U.S. House of Representatives voted to overturn the rule in July, and the White House said Tuesday that it will sign off on eliminating the arbitration rule.

The CRA also bars the CFPB from replacing the now-overturned arbitration rule with a replacement that looks substantially similar, effectively ending the bureau’s efforts to rein in arbitration.

The above was first reported by Law360.

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