OCC and CFPB disagree over arbitration rule - FINANCIAL-24 - FINANCIAL-24, we has prepared this article well for you to read and retrieve information in it. Okay, happy reading.

OCC and CFPB disagree over arbitration rule - FINANCIAL-24

By Andrew A. Turner, J.D.

The Office of the Comptroller of the Currency has reviewed a working paper that the Consumer Financial Protection Bureau relied on in formulating its final rule prohibiting mandatory arbitration agreements and concluded that the arbitration rule will increase costs of credit cards. Meanwhile, CFPB Director Richard Cordray has responded to criticism questioning the impact of the rule on consumers and financial institutions.

The working paper by Alexei Alexandrov, “Making firms liable for consumers' mistaken beliefs: theoretical model and empirical applications to the U.S. mortgage and credit card markets,” finds a strong probability of a significant increase in the cost of credit cards as a result of eliminating mandatory arbitration clauses.

Final rule. The Bureau issued a final rule prohibiting mandatory arbitration agreements for credit cards and certain other financial products with the stated rational being that eliminating mandatory arbitration clauses in contracts for certain financial products introduces a financial liability for financial service providers in the form of a potential increase in class action lawsuits. According to the CFPB, this additional financial liability may lead to greater compliance by financial institutions and make consumers more likely to obtain relief in the event of a dispute.

As part of its arbitration study, the CFPB reported that it did not find any statistically significant evidence of increases in the cost of credit to consumers associated with banning mandatory arbitration in credit card markets.

Working paper. Alexandrov constructed a model to show circumstances in which introducing a financial liability on firms can improve social welfare and consumer surplus. He then conducted statistical analysis of credit card data to estimate price increases. While he found the results of his analysis were statistically insignificant and he could not reject the hypothesis that there were no costs to consumers, Alexandrov was careful to point out that he could not rule out economically significant costs.

OCC findings. The OCC has analyzedand verified the Alexandrov results that were summarized by the CFPB in their arbitration study and discuss potential increased costs to consumers from eliminating mandatory arbitrage clauses. Given the substantial costs to financial firms estimated by the CFPB, one would expect some of these costs to be passed on to consumers or the availability of certain financial services products to decline where costs could not be recouped. The OCC has confirmed Alexandrov’s results using his assumptions and specification and elaborated on his comments about the economic significance of introducing additional financial liability in credit card markets. Consumers face significant risk of a substantial rise in the cost of credit.

According to Alexandrov, the CFPB, and OCC, the magnitude of the effect on pricing is uncertain, but there is a high likelihood that the total cost of credit will increase. However, this analysis does not explore the potential effect on consumer payments, their ability to pay the higher cost, and the potential for an increase in delinquencies, or changes in the availability of certain financial products intended to meet the financial needs of consumers.

 

CFPB defense of arbitration rule. The CFPB argues that it issued a rule that prevents financial companies from using arbitration clauses to deny groups of consumers the ability to pursue their legal rights in court after conducting a comprehensive study that found that arbitration clauses were effectively blocking billions of dollars of relief for millions of harmed consumers. Cordray authored a column, The truth about the arbitration rule is it protects American consumers, in The Hill on October 16, responding to Noreika's October 13 column, Senate should vacate the harmful consumer banking arbitration rule.

Cordray also defended the rule in a letter to U.S. Senator Sherrod Brown (D-Ohio), which included a review by the CFPB's Office of Research.

For more information about the CFPB's rule on mandatory arbitration clauses, subscribe to the Banking and Finance Law Daily.

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