Richard Cordray’s Financial Damage
President Trump still hasn’t dismissed Consumer Financial Protection Bureau director Richard Cordray despite several removable offenses. But Mr. Cordray is all but begging to be fired with his mandatory arbitration ban that brazenly flouts the law.
The CFPB on Monday finalized a rule forbidding class-action waivers in arbitration agreements. Dodd-Frank prohibited mandatory arbitration in most residential mortgage contracts and directed the bureau to study their use in other consumer financial services. Congress allowed the CFPB to “prohibit or impose conditions or limitations on the use of” arbitration if it finds doing so “is in the public interest and for the protection of consumers.”
In 2015 the CFPB released a 148-page study that is more political than scientific. Like the agency’s enforcement actions, the study engages in misdirection and obfuscation. The bureau avoids apples-to-apples comparisons and has stonewalled requests by the House Financial Services Committee for its raw data. But the evidence still suggests that consumers derive greater benefits from arbitration than they do from class-action lawsuits.
Of the 562 class actions the CFPB studied, none went to trial. Most were dismissed by a judge, withdrawn by the plaintiffs or settled out of class. The putative class victims received benefits in fewer than 20% of cases, and the average cash recovery was—wait for it—$32. Lawyers took an average 24% cut of the cash payments (about $424 million) in cases that settled.
Meanwhile, consumers were awarded relief in 32 of the 158 arbitration disputes the bureau examined, and rewards averaged $5,389—or about 57% of every dollar claimed. Consumers who used arbitration received relief on average in two months after filing claims. Class-action members had to wait two years.
Yet the CFPB has determined that class actions are necessary to protect consumers, even though state Attorneys General and federal agencies can do the job. The rule would apply to nearly all purveyors of consumer financial services save government agencies. That could include colleges that make loans to students.
Mr. Cordray says that “mandatory arbitration clauses force consumers either to give up or to go it alone.” But consumers can usually arbitrate disputes by phone or online without an attorney. Arbitration industry rules require that companies pay almost all of the filing, administrative and arbitrator costs. Individual costs are capped at between $200 and $250, which most companies cover.
The main beneficiaries of the rule will be trial attorneys who use the threat of class actions to extract fat settlements. Yet most disputes can’t be resolved on a class basis, and companies will likely stop using arbitration if they have to spend millions to defend class actions.
The Office of the Comptroller of the Currency this week raised concerns that the resulting increased cost of litigation could adversely affect the safety and soundness of the federal banking system. Community and mid-sized banks would have to hold greater reserves because of future expected litigation expenses, which could reduce lending.
Mr. Cordray has clearly violated Congress’s directions to the bureau and the Administrative Procedure Act by promulgating a rule that contradicts the bureau’s own administrative record. Republicans could repeal the rule during the next 60 legislative days with a simple majority using the Congressional Review Act, though Mr. Cordray is probably hoping that they will be too distracted by health care, presidential nominations and tax reform.
Or perhaps he’s eager to launch his campaign for Governor in Ohio. President Trump could have blocked the class-action rule had he fired Mr. Cordray upon taking office. But he can still dismiss him now for “inefficiency, neglect of duty, or malfeasance in office,” and his conduct surely constitutes all of the above. For everyone’s sake, Mr. Trump should grant Mr. Cordray’s apparent wish to be fired.