The Consumer Financial Protection Bureau’s (CFPB) arbitration proposal could have a number of negative effects on consumers and financial institutions, witnesses and congressmen said at a Wednesday hearing on the proposal. CUNA believes the proposal is inappropriate for credit unions, depriving consumers of an efficient dispute resolution process, and explained those concerns in a letter sent Tuesday.
The hearing was conducted by the House Financial Services subcommittee on financial institutions and consumer credit to examine potential consumer effects of the proposed rule. The CFPB’s proposal would effectively eliminate pre-dispute arbitration and would require financial institutions to insert language into their arbitration agreements reflecting this limitation.
Rep. Ed Royce (R-Calif.) said the proposal could jeopardize the relationships credit unions and other community financial institutions work hard to establish with members.
"Community financial institutions such as credit unions and community banks have to maintain strong personal relationships with their customers. At a time of unprecedented regulatory burdens, their success depends on that,” he said, before asking a witness what will happen when the CFPB opens up credit unions and community banks to class action lawsuits.
The witness, Dong Hong, vice president and regulatory counsel with the Consumer Bankers Association, said that removing the ability for small financial institutions to work out disputes informally could mean major changes. Most notably, the institutions could need to have a conversation with their prudential regulator about increasing capital reserves for defensive litigation purposes.
Other committee members had concerns about the proposal's effect on low-income consumers.
“In my view, the proposed rule is a clear error in judgment by the bureau. It will perpetuate a gap by taking away a legal forum for low-income individuals and those with small and individualized claims,” said Rep. Randy Neugebauer (R-Texas), chair of the subcommittee. “That outcome would certainly not be for the protection of consumers.”
Rep. Keith Rothfus (R-Pa.) said he was also troubled, since the CFPB’s proposal could remove one method by which those consumers could obtain redress.
“I’m particularly concerned about the practical impact that the bureau’s proposed rule would have on consumers, both those trying to vindicate claims and those who are simply trying to obtain products and services in the marketplace,” he said. “With respect to the former, I worry that contrary to what the bureau claims, the proposed rule will disproportionally harm lower-income consumers by eliminating, rather than enhancing, avenues of resolution by increasing the costs to bring a complaint.”
Witness Andrew Pincus, a partner at Mayer Brown LLP, testified on behalf of the U.S. Chamber of Commerce.
“Will consumers be better off if arbitration is eliminated in favor of class actions? The bureau probably avoided confronting that question directly, because it knows the only possible answer to that is ‘no,’” Pincus said. “The cost, complexity and crowded nature of our court system makes it impossible for consumers to access courts for the kinds of claims they suffer most. Facts show that arbitration empowers consumers through the use of technology and gives them the ability to vindicate their rights without dependence on lawyers.”