It’s one of the most controversial components of the 2010 Dodd-Frank Act, but it has a nearly perfect political name. What member of Congress could possibly be against the Consumer Financial Protection Bureau (CFPB)?
The name is so perfect that hardly anyone stops to ask why the 20-plus federal statutes Dodd-Frank transferred to create the new agency failed to adequately protect consumers. The truth is that the Bureau’s architects had a very different kind of consumer protection in mind: protecting consumers from themselves.
Consider the Wells Fargo account scandal. The Bureau completely failed to protect those customers. State-based lawsuits in California uncovered the problem. And the Comptroller – not the CFPB – was likely the first federal regulator to know what was going on.
All the CFPB did was levy a fine after the Comptroller and the City and County of Los Angeles had levied their own fines.
There is no excuse for fraud, and it should be punished. But what, exactly, did the CFPB bring to this party, other than piling on? Perhaps centralizing more power at the federal level is not the best approach.
Back in 1982 when the Alternative Mortgage Transaction Parity Act (AMTPA) preempted state mortgage laws, consumer advocates argued that this federal takeover would only weaken consumer protection.
An excellent case can be made that weaknesses in the current legal framework made what happened at Wells more likely to occur, but political posturing has prevented Congress from having that discussion.
“Wells Fargo right now is using these arbitration clauses to claim that people whose names were used to open fake accounts cannot sue Wells Fargo because in the one true account they had ... there is a hidden arbitration clause,” [Warren] told reporters. “Wells Fargo is trying to use arbitration clauses to hide out from responsibility for opening fake accounts for millions of people in this country.”
Wells is undeniably using the arbitration clauses to try to prevent a class action suit. But Wells isn’t hiding behind anything – they screwed up and they’ve admitted it. Wells’ CEO testified before Congress and apologized, saying:
“I am deeply sorry that we failed to fulfill our responsibility to our customers, to our team members, and to the American public.”
That’s surely not enough for many people, but Wells is not hiding. Warren, on the other hand, is hiding. She’s hiding behind the Wells case because she knows that:
- Wells Fargo’s actions do not justify banning all arbitration agreements that block groups of consumers from bringing class-action lawsuits;
- the CFPB’s study does not support its ban on arbitration agreements;
- arbitration agreements are not a license to commit fraud;
- pre-dispute arbitration agreements are beneficial to consumers, especially for small-dollar claims;
- the CFPB’s arbitration rule is a gift to class action lawyers that collect enormous fees while aggrieved consumers get coupons; and
- the CFPB, as she conceived it, is in trouble.
Ultimately, the Wells Fargo case is nothing more than a distraction that’s delaying Congress from protecting consumers from the CFPB.
The Dodd-Frank Act directed the CFPB to limit or prohibit arbitration clauses only after a thorough study provided evidence to support such actions. But the CFPB’s study clearly does not make the case for banning arbitration agreements.
Arbitration has a long history of benefiting consumers by providing an unbiased, cost effective alternative way to resolve disputes.
Members who really want to protect consumers will help enact liability reforms that create better safeguards against fraud.
Ideally, policymakers would design a fraud deterrence regime that concentrates on individual rather than corporate liability. Under the existing system, Wells shareholders are still suffering from the actions of front-line employees, many of whom were fired long ago.
Perhaps if employees who commit fraud are individually held liable, there would be less fraudulent activity.
Congress should also consider imposing stricter corporate civil (rather than criminal) penalties to better align shareholder incentives, and to make clearer distinctions between federal and state enforcement responsibilities.
There’s very little chance that Congress will completely redesign the fraud deterrence regime anytime soon. But Congress can fix the mess that it created with the CFPB.
First, it can use the Congressional Review Act (CRA) to nullify the CFPB’s arbitration rule.
The CRA allows Congress to invalidate an agency rule via a joint resolution of disapproval signed by the president. It gives Congress a limited period—60 days after the rule is received by Congress—to nullify the rule, and the resolution only need pass by a simple majority in both chambers of Congress.
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).
Next, Congress can eliminate the CFPB and protect consumers based on the ideas in the Financial CHOICE Act, the financial regulatory reform bill that the U.S. House recently passed.
The CHOICE Act would rename and restructure the CFPB. It would convert the Bureau to an enforcement-only agency, and authorize the President to fire the director at will. It would also require, among other changes, that funding for the new agency go through the regular appropriations process.
The CHOICE Act is unlikely to get 60 votes in the Senate, but Republicans can still pass key sections of the CHOICE Act with only the 52-seat majority they currently hold. They can do so through the budget reconciliation process because the Congressional Budget Office (CBO) recently estimated “that enacting the legislation would reduce federal deficits by $24.1 billion over the 2017-2027 period.”
The CBO report is a green light for the Senate to reform key parts of the Dodd-Frank Act, thus protecting taxpayers and strengthening financial markets. While waiting on reconciliation, senators can quickly protect consumers by using the CRA to nullify the arbitration rule.
Congress should waste no time in nullifying the arbitration rule and then adopting Dodd-Frank reforms such as those included in the Financial CHOICE Act.
This piece originally appeared on Forbes.com