Arbitration Rule Could Raise the Cost of Credit by 25 Percent

A study by the Office of the Comptroller of the Currency (OCC) found that the Consumer Financial Protection Bureau’s arbitration rule is likely to increase the cost of credit by about 25 percent once lenders factor in the cost of class action litigation, Acting Comptroller Keith Noreika said on September 28 at the Philadelphia Fed's fintech conference.

“What we found is that there could be as high as a three-and-a-half percent annual percentage rate increase for consumers who would be subject to the rule,” Noreika said. “That’s a 25 percent increase in credit costs for people who may live week to week. There’s a real, tangible economic effect that it may have on consumers.”

He said the OCC conducted the study because it wanted to review the effects of the CFPB’s rule -- which virtually bans mandatory arbitration agreements in contracts for financial products and services -- on banks and the customers they serve. “What originally caught my eye...was the potential impact that [the rule] may have on small institutions...that really may face a massive litigation exposure,” he said.

Bank and credit union trade groups ares backing efforts in Congress to overturn the arbitration rule. A Congressional Review Act resolution passed the House this summer and is awaiting action in the Senate.