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Richard Cordray’s Bad Numbers

The Wall Street Journal, October 22, 2017

By: The Editorial Board

President Trump has plenty of cause to fire Consumer Financial Protection Bureau Director Richard Cordray. But if he wants more, he should consult a forthcoming Treasury report on how the bureau rigged a study in support of its arbitration rule benefiting Mr. Cordray’s trial lawyer pals.

The CFPB in July finalized a rule prohibiting mandatory arbitration agreements that forbid customers from filing class-action lawsuits. Dodd-Frank authorized the CFPB to limit or ban such agreements if it found that doing so would be in the public interest and protect consumers. However, according to a new Treasury analysis of the CFPB’s 2015 study, the rule would hurt consumers and the economy.

Consider: Only 13% of class actions that the CFPB studied resulted in a recovery for members. In the average case, plaintiffs received $32 while attorneys hauled in more than $1 million. The average arbitration award was $5,389. Businesses typically also covered all arbitration costs for consumers.

One reason the typical payout in class actions was so meager is that payments to members wasn’t automatic in 60% of settlements. Members usually had to file claims to obtain awards, and only in about 4% of cases did they do so. The primary beneficiaries of the rule are attorneys who reeled in 31% of consumer payouts. However, the CFPB inexplicably projected that lawyers would take only a 19% cut of the total payout in prospective class actions. Does Mr. Cordray plan to negotiate a discount with trial lawyers on behalf of consumers?

The consumer bureau’s own data showed that the rule would transfer $330 million from businesses to plaintiff attorneys over the next five years. Businesses would also have to spend more than $500 million on defending lawsuits and $1.7 billion on settlements. While many lawsuits have no merit, businesses often settle to minimize legal expenses.

These extortive settlements reduce economic efficiency, yet the bureau disregarded the costs of frivolous litigation. A bank that pays out millions to lawyers has millions less to spend on customer services. Assuming that 10% of class action lawsuits are meritless—a low estimate—the rule would need to reduce harm to consumers by $500 million a year to produce a net societal benefit. Treasury notes that the rule “does not come close to making that showing.”

While the bureau also claimed that the costs of the rule would not be passed onto consumers, the Office of the Comptroller of the Currency’s independent review of the data found an 88% chance that the total cost of credit would increase. The CFPB also didn’t weigh the costs and benefits of less heavy-handed alternatives to the rule such as increased disclosure or a more limited ban.

The CFPB’s oversights are so many and so egregious that they suggest intent more than negligence, and the Treasury report provides ample evidence that the rule is arbitrary and capricious, which would make it illegal. It also gives the President all the more reason to replace Mr. Cordray.

We’re told the Senate may vote as early as Tuesday on a Congressional Review Act resolution to overturn the rule, as the House has already done. Republicans might consider that the rule benefits no one but the lawyers who donate to Democrats.