The CFPB: Reining in Dodd-Frank’s Regulatory Monster

By at 13 September, 2017, 10:15 am


by Raymond J. Keating-

Government regulations always hit smaller businesses much harder – including by discouraging new entrants into the regulated industry – than their larger competitors. That goes for regulating the financial industry as well, such as via the Dodd-Frank financial regulation law.

Perhaps the most glaring problem with the Dodd-Frank law is the Consumer Financial Protection Bureau (CFPB), which wields formidable power with little or no credible oversight. When it comes to the CFPB, substantive checks and balances are nearly nonexistent.

For example, the director of the CFPB does not serve at the will of the president, but instead can only be removed for certain causes. Also, the CFPB’s budget is not approved or disapproved by Congress, but instead its resources come out the Federal Reserve’s budget. These facts have led to the constitutionality of the CFPB to be challenged in court, and a court ruling against its structure.

See SBE Council president & CEO Karen Kerrigan’s Small Business Insider blog post, which reviews the various CFPB reforms bills that have been introduced in the Congress (and passed by the U.S. House) and the court ruling against CFPB: Court Ruling – CFPB Power Structure is Unconstitutional

Despite its Questionable Status and Authority, CFPB Regulatory Overreach Marches On

As the CFPB legal challenge moves forward in the courts, the bureau nonetheless is pushing ahead with a dubious and costly regulatory agenda.

For example, on July 10 of this year, the CFPB prohibited financial institutions from including arbitration clauses that restrict class action lawsuits in contracts with their customers.  This is an odd regulation to be imposed by the CFPB given that arbitration serves both consumers and businesses well by reducing costs and the time involved in resolving disputes. Meanwhile, the clearest beneficiaries of class action lawsuits are lawyers.

In a September 11, 2017, analysis, Alan S. Kaplinsky and Mark J. Levin explained the marked difference between arbitration and class action lawsuits:

“The CFPB’s own statistics reveal the arbitration rule’s fatal flaws. The CFPB’s study found that only 12.3 percent of the 562 class actions studied produced any settlement benefits to the putative class members. Most class actions settle individually, leaving the putative class members to fend for themselves. Only the plaintiffs’ class-action lawyers benefitted in those cases, receiving more than $400 million in attorneys’ fees.

“The 12.3 percent of class actions that settled on a class-wide basis produced only minuscule benefits—an average of $32—for the settlement class members who had to wait for two or more years to receive even that paltry sum. In the class settlements that required the putative class members to submit a claim form, the weighted average claims rate was only 4 percent, meaning that 96 percent of the potentially eligible putative class members failed to obtain any benefits because they did not submit claims.

“By contrast, the average award to a prevailing consumer in arbitration was $5,389 —166 times what putative class members recover on average in class settlements. Those consumers received their award within five months, instead of in more than two years. And the costs to the consumer were minimal, typically $200, at most, compared to the $400 fee for filing a complaint in federal court.”

As House Financial Services Committee Chairman Jeb Hensarling (R-TX), in part, stated: “This bureaucratic rule will harm American consumers but thrill class action trial attorneys… As a matter of principle, policy, and process, this anti-consumer rule should be thoroughly rejected by Congress under the Congressional Review Act.”

U.S. House Deploys Congressional Review Act as a Needed Check on CFPB

Under the Congressional Review Act  (CRA), Congress can vote to disapprove any new rules issued by federal agencies within 60 session days. And the U.S. House of Representatives, on July 27, did in fact vote by a margin of 231-190 to repeal the CFPB’s misguided anti-arbitration regulation.

Now, it’s up to the Senate, as the White House has voiced its support for repeal. In a Statement of Administration Policy,” it was noted:

“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).”

As SBE Council has noted previously, excessive regulation has hindered the creation of new banks. And as we reported in a recent SBE Council analysis, small business lending has failed to climb back to its pre-recession levels. While assorted factors account for this, part of the underlying cause is “a hostile regulatory environment for financial institutions.” The anti-arbitration rule will only exacerbate the onerous environment.

Of course, the entire financial industry is dominated by small businesses and institutions.  Taking away the option of arbitration for small businesses and consumers – even beyond the financial sector – will put these firms at a disadvantage while presenting trial lawyers with a huge gift at their expense.

CFPB rulemakings and activity must undergo even closer scrutiny given its questionable constitutional structure, its history of secretive deliberations, as well as talk that the current director, Richard Cordray, plans to leave soon and perhaps seek political office.  The U.S. Senate now needs to follow the House’s lead, and vote to repeal the CFPB’s anti-arbitration rule. Arbitration as a smart and practical option that must be protected for small businesses and consumers.


Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

Keating’s latest book published by SBE Council is titled Unleashing Small Business Through IP:  The Role of Intellectual Property in Driving Entrepreneurship, Innovation and Investment and it is available free on SBE Council’s website here.

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