1 00:00:00,000 --> 00:00:03,600 Speaker 1: The country's consumer watchdog is making it easier for customers 2 00:00:03,600 --> 00:00:06,520 Speaker 1: to sue banks and class actions, a move which is 3 00:00:06,519 --> 00:00:10,560 Speaker 1: sure to be widely opposed by financial industry groups, congressional Republicans, 4 00:00:10,560 --> 00:00:14,240 Speaker 1: and the White House. The Consumer Financial Protection Bureau adopted 5 00:00:14,280 --> 00:00:18,120 Speaker 1: a new rule on Monday banning financial firms from forcing 6 00:00:18,239 --> 00:00:21,400 Speaker 1: customers to arbitrate disputes and to give up their rights 7 00:00:21,400 --> 00:00:25,560 Speaker 1: to go to court. My guests are Raphael Mangual, a 8 00:00:25,680 --> 00:00:30,120 Speaker 1: legal policy project manager at the Manhattan Institute, and Mike Gonzal, 9 00:00:30,280 --> 00:00:33,120 Speaker 1: a fellow at the Roosevelt Institute and founder of the 10 00:00:33,200 --> 00:00:37,920 Speaker 1: Roardy baumb financial blog who is in the Bloomberg Studios. 11 00:00:38,400 --> 00:00:42,279 Speaker 1: Mike tell us about these mandatory arbitration clauses that are 12 00:00:42,320 --> 00:00:45,800 Speaker 1: found often in the fine print of everything from credit 13 00:00:45,840 --> 00:00:49,080 Speaker 1: cards to checking accounts. Yes, and they go far beyond 14 00:00:49,120 --> 00:00:52,960 Speaker 1: that too, to elderly care homes, to students and a 15 00:00:53,080 --> 00:00:55,920 Speaker 1: for profit schools. But in the financial world, where the 16 00:00:55,920 --> 00:00:59,400 Speaker 1: CFPB has jurisdiction, there are two big developments I think 17 00:00:59,440 --> 00:01:02,280 Speaker 1: that happened last two years that really pushed this into 18 00:01:02,280 --> 00:01:04,720 Speaker 1: the public consciousness. Once one was a series of reporting 19 00:01:04,760 --> 00:01:07,320 Speaker 1: by the New York Times really just saying how broad 20 00:01:07,440 --> 00:01:10,920 Speaker 1: and widespread this is, um that virtually every type as 21 00:01:10,959 --> 00:01:13,279 Speaker 1: you just mentioned, but virtually every type of financial product, 22 00:01:13,319 --> 00:01:16,240 Speaker 1: be it your credit card, be it you're checking account. 23 00:01:16,280 --> 00:01:18,839 Speaker 1: Basically anything that is not a mortgage, which is banned 24 00:01:18,880 --> 00:01:22,080 Speaker 1: by law from having these kinds of arbitration of being forced, 25 00:01:22,680 --> 00:01:24,880 Speaker 1: has these kinds of contracts, and it really is a 26 00:01:24,920 --> 00:01:27,319 Speaker 1: transfer of power from people's ability to go to court, 27 00:01:27,360 --> 00:01:30,880 Speaker 1: people's ability to be seen with public power, into private power, 28 00:01:31,000 --> 00:01:34,559 Speaker 1: into setting set by the banks themselves. And the second 29 00:01:34,640 --> 00:01:38,520 Speaker 1: was the Wells Fargo scandal. Um what people found, weirdly enough, 30 00:01:38,640 --> 00:01:41,960 Speaker 1: was that the fake accounts that people were signed up 31 00:01:41,959 --> 00:01:45,000 Speaker 1: for had these arbitration accounts, so people could not actually 32 00:01:45,360 --> 00:01:47,400 Speaker 1: sue in the way that they normally thought they would. 33 00:01:47,440 --> 00:01:50,520 Speaker 1: So the potential for abuse became very apparent, even though 34 00:01:50,520 --> 00:01:54,279 Speaker 1: it was always there. Raphael, What does this new rule 35 00:01:54,400 --> 00:01:59,280 Speaker 1: by the Consumer Financial Protection Bureau do well? It would 36 00:01:59,320 --> 00:02:04,040 Speaker 1: essentially and banks from blocking consumers from joining class action 37 00:02:04,200 --> 00:02:08,239 Speaker 1: lawsuits to resolve that there's their disputes with those banks. 38 00:02:08,320 --> 00:02:11,079 Speaker 1: And the way that banks and other financial institutions normally 39 00:02:11,120 --> 00:02:13,840 Speaker 1: do that is through the inclusion of an arbitration clause. 40 00:02:14,280 --> 00:02:17,239 Speaker 1: But the problem is that the opposition to these sorts 41 00:02:17,240 --> 00:02:21,000 Speaker 1: of clauses. Actually, I think UM reflects a fundamental misunderstanding 42 00:02:21,000 --> 00:02:25,120 Speaker 1: of how effective class actions actually are as a way 43 00:02:25,120 --> 00:02:27,840 Speaker 1: to resolve these disputes. Remember, most of these disputes per 44 00:02:27,840 --> 00:02:32,320 Speaker 1: small dollar amounts, and so individual litigation is not going 45 00:02:32,360 --> 00:02:35,080 Speaker 1: to be the most efficient way to handle that um, 46 00:02:35,120 --> 00:02:37,480 Speaker 1: which is the benefit of an arbitration because it's a 47 00:02:37,520 --> 00:02:40,400 Speaker 1: lot cheaper, a lot quicker, a lot more efficient, and 48 00:02:40,600 --> 00:02:43,880 Speaker 1: although most people don't know this, more often results in 49 00:02:43,960 --> 00:02:49,720 Speaker 1: a favorable ruling for a plaintiffs. Do you agree with that, Mike, 50 00:02:50,280 --> 00:02:56,200 Speaker 1: there's also class actions which are really easy for plaintiffs. Yeah, 51 00:02:56,200 --> 00:02:59,359 Speaker 1: so there's a quite I mean, this band's mandatory arbitration 52 00:02:59,480 --> 00:03:02,440 Speaker 1: right to these sent that arbitration is efficient and obviously 53 00:03:02,480 --> 00:03:04,720 Speaker 1: a good solution for people. It is still there is 54 00:03:04,720 --> 00:03:08,880 Speaker 1: an option. It just bands mandatory arbitration right. The mandatory 55 00:03:09,000 --> 00:03:12,840 Speaker 1: put of consumers into this kind of private realm of law. Now, 56 00:03:13,000 --> 00:03:15,120 Speaker 1: who sues their bank over thirty dollars? I mean, you 57 00:03:15,200 --> 00:03:18,359 Speaker 1: think of how sticky these contracts are. You know, if 58 00:03:18,400 --> 00:03:22,240 Speaker 1: your bank charges you twenty bucks that was invalid and fraudulent, 59 00:03:22,440 --> 00:03:24,000 Speaker 1: are you going to sue them? Are you going to 60 00:03:24,120 --> 00:03:25,720 Speaker 1: leave because you know you have to re goo to 61 00:03:25,840 --> 00:03:27,840 Speaker 1: HR and redo all your checking, you have to order 62 00:03:27,880 --> 00:03:30,120 Speaker 1: new checks, you have to change everything. You're probably just 63 00:03:30,200 --> 00:03:32,440 Speaker 1: going to eat it, especially if you do not know 64 00:03:32,480 --> 00:03:36,280 Speaker 1: that other banks have protections as well. So this really 65 00:03:36,320 --> 00:03:39,000 Speaker 1: does add an important element for consumers, and I think 66 00:03:39,040 --> 00:03:40,960 Speaker 1: crucially the big thing here is that it removes that 67 00:03:41,040 --> 00:03:45,120 Speaker 1: mandatory private power element. You do have your ability to 68 00:03:45,160 --> 00:03:47,360 Speaker 1: go to a court, you do have your ability to 69 00:03:47,360 --> 00:03:49,640 Speaker 1: band with other people in a way that is no 70 00:03:49,720 --> 00:03:53,040 Speaker 1: longer dictated to you by the financial industry as a whole. Rafael, 71 00:03:53,080 --> 00:03:57,200 Speaker 1: would you agree that for consumers this is a good thing. 72 00:03:57,600 --> 00:04:01,440 Speaker 1: It might not be good for financial organizations. No, it's 73 00:04:01,480 --> 00:04:04,040 Speaker 1: actually more likely to hurt consumers. And so one of 74 00:04:04,040 --> 00:04:06,040 Speaker 1: the big reasons that you see some of the support 75 00:04:06,080 --> 00:04:09,640 Speaker 1: that you're seeing for this new rule is this notion 76 00:04:09,760 --> 00:04:13,200 Speaker 1: that you know there that consumers are essentially you know, 77 00:04:13,280 --> 00:04:16,200 Speaker 1: without power in terms of you know, coming out on 78 00:04:16,279 --> 00:04:19,320 Speaker 1: top of these disputes. But the Manhattan Institute actually published 79 00:04:19,320 --> 00:04:22,799 Speaker 1: a report by UM University of Virginia professor Jason Johnston 80 00:04:23,680 --> 00:04:26,760 Speaker 1: a while back, and that report actually found that seventy 81 00:04:27,760 --> 00:04:30,640 Speaker 1: of the time a bank would actually refund the fees 82 00:04:30,640 --> 00:04:33,520 Speaker 1: in response to a consumer complaint. And so again I 83 00:04:33,520 --> 00:04:35,840 Speaker 1: think a lot of the support for this new rule 84 00:04:35,880 --> 00:04:40,080 Speaker 1: to CEFPB is based on a fundamental just misunderstanding of 85 00:04:40,120 --> 00:04:42,240 Speaker 1: what the facts on the ground are. And so the 86 00:04:42,279 --> 00:04:45,040 Speaker 1: notion that you know, allowing these consumers to join class 87 00:04:45,080 --> 00:04:48,360 Speaker 1: actions is somehow going to result and you know, payoffs 88 00:04:48,400 --> 00:04:50,720 Speaker 1: for them is just not reflected in reality. I mean, 89 00:04:50,760 --> 00:04:54,240 Speaker 1: the CFPPS own report that they that they published in 90 00:04:54,279 --> 00:04:57,799 Speaker 1: support of this rule found that consumers were only getting 91 00:04:57,800 --> 00:05:02,160 Speaker 1: about thirty two dollars um each UH in the unlikely 92 00:05:02,200 --> 00:05:04,479 Speaker 1: event that a class action settled the resulted in a 93 00:05:04,480 --> 00:05:07,920 Speaker 1: favorable verdict, whereas arbitrations that went to a decision delivered 94 00:05:07,960 --> 00:05:10,440 Speaker 1: an average of over five thousand dollars for consumers. And 95 00:05:10,440 --> 00:05:13,240 Speaker 1: the notion that this is good for consumers is just 96 00:05:13,400 --> 00:05:17,400 Speaker 1: um again, not rooted in the facts, Mike. The CFPB 97 00:05:17,640 --> 00:05:20,960 Speaker 1: report also found that hundreds of millions of these contracts 98 00:05:21,040 --> 00:05:24,640 Speaker 1: include arbitration provisions and that companies have used the clauses 99 00:05:24,720 --> 00:05:27,520 Speaker 1: to keep fights out of court almost two thirds of 100 00:05:27,560 --> 00:05:32,240 Speaker 1: the time. Are there other problems with that? Yeah, I mean, 101 00:05:32,440 --> 00:05:35,320 Speaker 1: if this was so bad, if this was such a 102 00:05:35,360 --> 00:05:37,200 Speaker 1: good thing for the banks that they would now pay 103 00:05:37,279 --> 00:05:40,400 Speaker 1: less somehow. Um, it's weird that the banks opposed it 104 00:05:40,520 --> 00:05:43,480 Speaker 1: so much and consumer groups are so actively for it. Um. 105 00:05:43,520 --> 00:05:45,640 Speaker 1: You know, there is obviously a big bias. You know, 106 00:05:45,680 --> 00:05:48,000 Speaker 1: The New York Times investigated this and sound and found 107 00:05:48,760 --> 00:05:52,440 Speaker 1: quite clearly very few people will ever sue or go 108 00:05:52,520 --> 00:05:54,920 Speaker 1: to a court or try to go to arbitration over 109 00:05:55,400 --> 00:05:57,960 Speaker 1: something like twenty or thirty dollars. Now, it is true 110 00:05:57,960 --> 00:06:00,560 Speaker 1: that banks will often, you know, refund is because of 111 00:06:00,800 --> 00:06:02,840 Speaker 1: there's now much more active enforcement as a result of 112 00:06:02,880 --> 00:06:05,679 Speaker 1: the CFPB. But broadly, you want to think in terms 113 00:06:05,720 --> 00:06:10,200 Speaker 1: of what are avenues that people have to find remedies 114 00:06:10,240 --> 00:06:12,880 Speaker 1: against banks and they're not going to leave their bank 115 00:06:12,920 --> 00:06:16,200 Speaker 1: over twenty dollars, and especially if other banks may also 116 00:06:16,240 --> 00:06:18,960 Speaker 1: be committing the same kinds of problems. Raphael. Under the 117 00:06:19,000 --> 00:06:23,800 Speaker 1: Congressional Review Act, lawmakers have sixty legislative days from the 118 00:06:23,839 --> 00:06:27,679 Speaker 1: time they formally received the rule to overturn the bureau's decision, 119 00:06:27,720 --> 00:06:30,240 Speaker 1: and then they've used that to reverse fourteen rules from 120 00:06:30,240 --> 00:06:33,359 Speaker 1: the Obama administration. Will they be able to do the 121 00:06:33,400 --> 00:06:37,320 Speaker 1: same with this rule? Uh, they certainly should look into 122 00:06:37,360 --> 00:06:39,720 Speaker 1: doing that. UM. The question of you know, whether or 123 00:06:39,760 --> 00:06:41,400 Speaker 1: not they'll actually be able to do it is is 124 00:06:41,440 --> 00:06:43,200 Speaker 1: still up for debate. But I think they will and 125 00:06:43,240 --> 00:06:45,760 Speaker 1: I think they should. But even if they don't, this 126 00:06:45,839 --> 00:06:48,000 Speaker 1: rule is likely going to run into a lot of 127 00:06:48,040 --> 00:06:51,120 Speaker 1: litigation UM in opposition to it UM, and that litigation 128 00:06:51,160 --> 00:06:53,560 Speaker 1: is most likely going to be centered on the question 129 00:06:53,600 --> 00:06:57,360 Speaker 1: of whether or not the cfpb s own findings actually 130 00:06:57,400 --> 00:07:02,040 Speaker 1: support the promulgation of the rule. And Mike, the head 131 00:07:02,080 --> 00:07:05,400 Speaker 1: of the key banking regulator, wrote to the head of 132 00:07:05,480 --> 00:07:09,800 Speaker 1: the CFPB to raise concerns about the rule. Um the 133 00:07:09,840 --> 00:07:13,520 Speaker 1: controller of the currency asked that they share data used 134 00:07:13,520 --> 00:07:17,960 Speaker 1: to develop its arbitration rule. Tell me what the implications 135 00:07:17,960 --> 00:07:22,120 Speaker 1: of that are in about forty five seconds. Sure, So 136 00:07:22,160 --> 00:07:25,400 Speaker 1: there's obviously, as was just brought up, the Congressional Review 137 00:07:25,400 --> 00:07:28,120 Speaker 1: Act might be something that happens. The sentence very busy 138 00:07:28,160 --> 00:07:30,160 Speaker 1: with healthcare and soon to be tax reforms, so there's 139 00:07:30,160 --> 00:07:32,640 Speaker 1: a question the timing and a tough vote. The other 140 00:07:32,720 --> 00:07:35,880 Speaker 1: regulators could overrule the CFPP. The CFPP has this extra 141 00:07:35,880 --> 00:07:39,680 Speaker 1: accountability measure that two thirds of the regulators could overrule it, 142 00:07:39,720 --> 00:07:42,200 Speaker 1: and the o c c S actions could be understood 143 00:07:42,240 --> 00:07:44,680 Speaker 1: as a measure to try to gain support for that. 144 00:07:44,680 --> 00:07:47,200 Speaker 1: That is going to be a big lift, and it 145 00:07:47,520 --> 00:07:49,240 Speaker 1: is not clear whether or not that would work one 146 00:07:49,240 --> 00:07:51,480 Speaker 1: way or the other. Well, this will be something interesting 147 00:07:51,520 --> 00:07:53,600 Speaker 1: to watch. Thank you both for being with us here 148 00:07:53,600 --> 00:07:57,440 Speaker 1: on Bloomberg Law. That's Raphael Manuel, he's a legal policy 149 00:07:57,520 --> 00:08:01,080 Speaker 1: project manager at the Manhattan Institute. And Mike Gonzal, he's 150 00:08:01,120 --> 00:08:03,520 Speaker 1: a fellow at the Roosevelt Institute and founder of the 151 00:08:03,640 --> 00:08:07,280 Speaker 1: Roardy Baum Financial blog. That's it for this edition of 152 00:08:07,320 --> 00:08:09,840 Speaker 1: Bloomberg Law. Will be back tomorrow at one pm Wall 153 00:08:09,880 --> 00:08:12,400 Speaker 1: Street time, and hope you'll join us. Thanks to our 154 00:08:12,400 --> 00:08:16,120 Speaker 1: producer David Suckerman, and happy birthday to David and our 155 00:08:16,240 --> 00:08:19,880 Speaker 1: technical director Sean Kilby. You can always find the latest 156 00:08:19,960 --> 00:08:22,840 Speaker 1: legal news at Bloomberg Law dot com and Bloomberg na 157 00:08:23,000 --> 00:08:25,280 Speaker 1: dot com, plus a website for the legal community at 158 00:08:25,280 --> 00:08:28,760 Speaker 1: Big Law Business dot com. Coming up next, Bloomberg Markets 159 00:08:28,760 --> 00:08:31,440 Speaker 1: with Carol Master and Corey Johnson. You've been listening to 160 00:08:31,440 --> 00:08:34,560 Speaker 1: Bloomberg Law. I'm Jun Grosso. This is Bloomberg