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 analyzed
and 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.
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.
