PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

Letter to Senate Majority Leader McConnell on H.R. Res. 111 – CFPB’s Anti-Arbitration Rule

By at 17 October, 2017, 10:20 am

The Honorable Mitch McConnell
Majority Leader
United States Senate
S-230 U.S. Capitol
Washington, D.C. 20510

Dear Majority Leader McConnell:

On behalf of the Small Business & Entrepreneurship Council (SBE Council) and our nationwide
membership of more than 100,000 entrepreneurs and small business supporters across the
country, I urge the Senate to move quickly on H.J. Res. 111. This important resolution, which
passed the U.S. House of Representatives on July 27, would correctly roll back the misguided
and costly anti-arbitration rule promulgated by the Consumer Financial Protection Bureau
(CFPB).

Specifically, on July 10, the CFPB prohibited financial institutions from including arbitration
clauses that restrict class action lawsuits in contracts with their customers. Given that arbitration
serves both consumers and businesses well by reducing the costs and the time involved in
resolving disputes, this was a very peculiar action taken by the CFPB. Indeed, the CFPB used a
flawed and biased study to advance its rule, and ignored common sense suggestions and calls
from Congress to develop a more sensible approach. This lack of accountability, responsiveness
and transparency at the CFPB is what galls entrepreneurs and the public about the rulemaking
process in Washington. They are deeply concerned about the influence of special-interest
meddling in rulemaking, and indeed their concerns are warranted in this case as it appears that
the only real beneficiaries of the anti-arbitration rule are the lawyers who undertake class action
lawsuits.

Small businesses certainly would not benefit from this ruling by the CFPB. Quite the contrary.
For example, SBE Council agrees with a July 24, 2017, Statement of Administration Policy from
the Trump Administration supporting H.J. Res. 111: “If allowed to take effect, the CFPB’s
harmful rule would benefit trial lawyers by increasing frivolous class-action lawsuits; harm
consumers by denying them the full benefits and efficiencies of arbitration; and hurt financial
institutions by increasing litigation expenses and compliance costs (particularly for community
and mid-sized institutions).”

The Administration’s concerns are absolutely correct. Indeed, a recent study by the Office of
Comptroller of the Currency found that lenders may need to charge 25 percent more for credit
after factoring in the cost of class action litigation as a result of CFPB rule.

It must be kept in mind that most banks in the U.S. are small, midsized enterprises. For example,
according to the latest U.S. Census Bureau data (2015 the latest year), 75 percent of commercial
banks have fewer than 100 employees, and 95 percent have less than 500 employees.
Unfortunately the regulatory onslaught and uncertainty fostered by Dodd-Frank are helping to
shrink the number of independent commercial banks – more than 800 closed their doors from
2007-2013 according to the Federal Reserve Bank of Richmond, which detailed the failures and
collapse of new bank entry in a March 2015 Economic Brief:

“This collapse in new bank entry has no precedent during the past 50 years, and it could have
significant economic repercussions. In particular, the decline in new bank entry
disproportionately decreases the number of community banks because most new banks start
small. Since small banks have a comparative advantage in lending to small businesses, their
declining number could affect the allocation of credit to different sectors in the economy.”

Also, in a September 2017 SBE Council analysis (“The Worrisome Trends in Small Business
Lending, Solutions in the Pipeline”), SBE Council chief economist Raymond J. Keating looked
at recent trends in small business lending, and noted that “small business lending still has not
recovered to levels before the 2008-09 credit/economic meltdown.” As Keating pointed out, part
of the underlying cause has been “a hostile regulatory environment for financial institutions.”

Access to capital remains a challenge for many small business owners and entrepreneurs.
Enabling a common sense regulatory and business environment for financial institutions and in
the financial services industry will improve capital access and encourage more innovation,
competition and startups in this sector. Obviously, this will benefit our economy and America’s
small businesses and entrepreneurs. Access to capital is the lifeblood of entrepreneurship and
small business growth. America needs a more balanced regulatory system to support our
innovators and job creators.

Under the Congressional Review Act, as you know, Congress can vote to disapprove any new
rules issued by federal agencies within 60 session days. The House has done so, and now quick
action is needed by the Senate to repeal the CFPB’s anti-arbitration rule. Passing H.J. Res. 111
is a sound step as it would not only roll back this inequitable and misguided rule, but rein in the
accountable CFPB whose structure has been ruled unconstitutional by the courts.

Thank you, in advance, for your leadership and support of America’s entrepreneurs and small
businesses.

Sincerely,

Karen Kerrigan
President & CEO

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