New CFPB Rules Makes Consumer Bank Suits Easier (Audio)

to go to court. My guests are Raphael Mangual, a legal policy project manager at the Manhattan Institute, and Mike Gonzal, a fellow at the Roosevelt Institute and founder of the Roardy baumb financial blog who is in the Bloomberg Studios. Mike tell us about these mandatory arbitration clauses that are found often in the fine print of everything from credit cards to checking accounts. Yes, and they go far beyond that too, to elderly care homes, to students and a

for profit schools. But in the financial world, where the CFPB has jurisdiction, there are two big developments I think that happened last two years that really pushed this into the public consciousness. Once one was a series of reporting by the New York Times really just saying how broad and widespread this is, um that virtually every type as you just mentioned, but virtually every type of financial product, be it your credit card, be it you're checking account.

Basically anything that is not a mortgage, which is banned by law from having these kinds of arbitration of being forced, has these kinds of contracts, and it really is a transfer of power from people's ability to go to court, people's ability to be seen with public power, into private power, into setting set by the banks themselves. And the second

was the Wells Fargo scandal. Um what people found, weirdly enough, was that the fake accounts that people were signed up for had these arbitration accounts, so people could not actually sue in the way that they normally thought they would. So the potential for abuse became very apparent, even though it was always there. Raphael, What does this new rule

by the Consumer Financial Protection Bureau do well? It would essentially and banks from blocking consumers from joining class action lawsuits to resolve that there's their disputes with those banks. And the way that banks and other financial institutions normally do that is through the inclusion of an arbitration clause. But the problem is that the opposition to these sorts

of clauses. Actually, I think UM reflects a fundamental misunderstanding of how effective class actions actually are as a way to resolve these disputes. Remember, most of these disputes per small dollar amounts, and so individual litigation is not going to be the most efficient way to handle that um, which is the benefit of an arbitration because it's a lot cheaper, a lot quicker, a lot more efficient, and although most people don't know this, more often results in

a favorable ruling for a plaintiffs. Do you agree with that, Mike, there's also class actions which are really easy for plaintiffs. Yeah, so there's a quite I mean, this band's mandatory arbitration right to these sent that arbitration is efficient and obviously a good solution for people. It is still there is an option. It just bands mandatory arbitration right. The mandatory put of consumers into this kind of private realm of law. Now, who sues their bank over thirty dollars? I mean, you

think of how sticky these contracts are. You know, if your bank charges you twenty bucks that was invalid and fraudulent, are you going to sue them? Are you going to leave because you know you have to re goo to HR and redo all your checking, you have to order new checks, you have to change everything. You're probably just going to eat it, especially if you do not know

that other banks have protections as well. So this really does add an important element for consumers, and I think crucially the big thing here is that it removes that mandatory private power element. You do have your ability to go to a court, you do have your ability to band with other people in a way that is no longer dictated to you by the financial industry as a whole. Rafael, would you agree that for consumers this is a good thing. It might not be good for financial organizations. No, it's

actually more likely to hurt consumers. And so one of the big reasons that you see some of the support that you're seeing for this new rule is this notion that you know there that consumers are essentially you know, without power in terms of you know, coming out on

top of these disputes. But the Manhattan Institute actually published a report by UM University of Virginia professor Jason Johnston a while back, and that report actually found that seventy of the time a bank would actually refund the fees in response to a consumer complaint. And so again I think a lot of the support for this new rule to CEFPB is based on a fundamental just misunderstanding of

what the facts on the ground are. And so the notion that you know, allowing these consumers to join class actions is somehow going to result and you know, payoffs

for them is just not reflected in reality. I mean, the CFPPS own report that they that they published in support of this rule found that consumers were only getting about thirty two dollars um each UH in the unlikely event that a class action settled the resulted in a favorable verdict, whereas arbitrations that went to a decision delivered an average of over five thousand dollars for consumers. And the notion that this is good for consumers is just

um again, not rooted in the facts, Mike. The CFPB report also found that hundreds of millions of these contracts include arbitration provisions and that companies have used the clauses to keep fights out of court almost two thirds of the time. Are there other problems with that? Yeah, I mean, if this was so bad, if this was such a good thing for the banks that they would now pay less somehow. Um, it's weird that the banks opposed it so much and consumer groups are so actively for it. Um.

You know, there is obviously a big bias. You know, The New York Times investigated this and sound and found quite clearly very few people will ever sue or go to a court or try to go to arbitration over something like twenty or thirty dollars. Now, it is true that banks will often, you know, refund is because of there's now much more active enforcement as a result of

the CFPB. But broadly, you want to think in terms of what are avenues that people have to find remedies against banks and they're not going to leave their bank over twenty dollars, and especially if other banks may also be committing the same kinds of problems. Raphael. Under the Congressional Review Act, lawmakers have sixty legislative days from the time they formally received the rule to overturn the bureau's decision, and then they've used that to reverse fourteen rules from

the Obama administration. Will they be able to do the same with this rule? Uh, they certainly should look into doing that. UM. The question of you know, whether or not they'll actually be able to do it is is still up for debate. But I think they will and

I think they should. But even if they don't, this rule is likely going to run into a lot of litigation UM in opposition to it UM, and that litigation is most likely going to be centered on the question of whether or not the cfpb s own findings actually support the promulgation of the rule. And Mike, the head of the key banking regulator, wrote to the head of the CFPB to raise concerns about the rule. Um the controller of the currency asked that they share data used

to develop its arbitration rule. Tell me what the implications of that are in about forty five seconds. Sure, So there's obviously, as was just brought up, the Congressional Review Act might be something that happens. The sentence very busy with healthcare and soon to be tax reforms, so there's a question the timing and a tough vote. The other

regulators could overrule the CFPP. The CFPP has this extra accountability measure that two thirds of the regulators could overrule it, and the o c c S actions could be understood as a measure to try to gain support for that. That is going to be a big lift, and it is not clear whether or not that would work one way or the other. Well, this will be something interesting to watch. Thank you both for being with us here on Bloomberg Law. That's Raphael Manuel, he's a legal policy

project manager at the Manhattan Institute. And Mike Gonzal, he's a fellow at the Roosevelt Institute and founder of the Roardy Baum Financial blog. That's it for this edition of Bloomberg Law. Will be back tomorrow at one pm Wall Street time, and hope you'll join us. Thanks to our producer David Suckerman, and happy birthday to David and our

technical director Sean Kilby. You can always find the latest legal news at Bloomberg Law dot com and Bloomberg na dot com, plus a website for the legal community at Big Law Business dot com. Coming up next, Bloomberg Markets with Carol Master and Corey Johnson. You've been listening to Bloomberg Law. I'm Jun Grosso. This is Bloomberg