The Legality Morality and Community Welfare of The CFPB Arbitration Rule

Running head: FINAL TERM PAPER

FINAL TERM PAPER 19

Integrating Values - The Legality, Morality, and Community Welfare of The CFPB Arbitration Rule

Abstract

This report will focus on the Consumer Financial Protection Bureau (CFPB) arbitration rule. This is a rule that bars financial companies from using arbitration clauses so that consumers should be prevented from pursuing their legal rights in court. This report will examine the reason for this agency's foundation and the basis on which this rule was formed. The legal applications of the arbitration would be discussed under rulemaking and adjudication. The ethical challenges that the rule would undergo would be explained in further sections regarding legal positivism and utilitarianism theory. Another similar theory of own choice would be presented for further elaboration to decide the ethicality of arbitration. Community welfare would be investigated for the agency's rule and whether it provides well-being and empowerment. A conclusion with recommendations would be provided so that maximized happiness for numerous stakeholders could be ensured.

Table of Contents

Introduction 3

Background Information Regarding Topic 5

Legal Section 7

Introduction to Legal Section 7

Statement of Relevant Legal Principles and Rules of Law 9

Legal Conclusion 10

Ethics Section 11

Introduction to Law and Ethics 11

Evaluation of Agency’s Rule under “Utilitarianism” Ethical Theory 14

Evaluation of Agency’s Rule under One More Ethical Theory 17

Personal Thoughts on the Agency’s Rule 18

Community Welfare Section 20

Conclusion 22

References 23

Integrating Values - The Legality, Morality, and Community Welfare of

The CFPB Arbitration Rule

Introduction

The law and ethics are interconnected since the violations of ethical behaviors need legal enforcements for their deterrence. The standards of behaviors are set by the law and its legal jurisdictions so that ethical behaviors are observed within the organization and the individual level. It becomes difficult to determine under what circumstances particular actions are considered ethical that might directly affect the public. Ethical management is crucial for not only economic profits but society at large. Business ethics are also intertwined with the business dealings with the world, involving all stakeholders where dealings with one stakeholder might have an indirect and unintentional effect. The concern rises for human morality, vice and virtue, and wrongdoing and fairness.

This analytical paper would be a "3 value" analysis of law, ethics, and community welfare. When business or agency ethics are discussed, the set of rules that define what is right and wrong are highlighted since a culture, grouping of attitudes and feelings are determined as rightfully ethical within a working place. If a conflict among these is witnessed, it creates a climate of clashing of interests between the stakeholders, bribes, a battle of loyalty and integrity. The ethical actions are also stretched to the arena of social responsibility since the society where a business or agency operates should be answerable for the community's welfare. Social responsibility is the compulsion for the policy or decision-makers to take actions that would impact welfare and improvements (Singh & Singh, 2013).

The current topic of the paper, which is the arbitration rule of Consumer Financial Protection Bureau (CFPB) and its deactivation from the US government so that consumers cannot file lawsuits against the banks or any relevant financial intuitions if they experience any illegal actions, is the highpoint for the analysis. CFPB consolidated federal consumer protection responsibilities launched by the Dodd-Frank Wall Street Reform and Consumer Protection Act in July 2010 (Copeland, 2010). On July 10, 2017, CFPB proclaimed a new rule under which the use of mandatory arbitration clauses for seeking justice in the court by the common public was barred from being applicable (Swanson, 2017). The rule's main purpose was to allow the consumer to use lawsuits against the companies, especially consumer financial products like credit card companies and financial institutions, for trying them in court for any of their wrongful deeds (Hayashi, 2015). However, after the government revoked the arbitration rule, the former CFPB Director Richard Cordray pled for the rule to be made effective again. He believed that the ordinary would lose their vocal power for speaking against the companies who do them wrong. The common public should be given a chance to pursue their legal rights and gain what is rightfully theirs.

The topic's significance is directly related to the social responsibility of the business firms and agencies for society's welfare. Consumers were barred from voicing their opinions regarding the banking firms' illegal actions, and credit card companies since the loss of the public's money would not be tried in court. Although proponents of this revocation of the arbitration rule by the government say that the government has saved the citizens and the financial companies from wasting a huge number of pennies on lawsuits, it had put a burden on the general public for remaining silent if the firms have committed any wrong act against them.

Background Information Regarding Topic

A recession and financial crisis in the late 2000s forced Congress to pass the Protection Act (Legislative Attorney, 2014). President Barack Obama appointed Warren as the President's Assistant and the Secretary of the Treasury's Special Advisor on an official basis for the Consumer Financial Protection Bureau (CFPB). The said agency was established on July 21, 2011, with its main focus on mortgages, credit cards, and student loans. Although the bureau operated independently, it was still funded by the United States Federal Reserves under the authority of the US Treasury Department. The bureau is responsible for devising rules for financial institutions for both banks and non-bank institutions. It also performs the obligations of evaluating markets, receiving and reviewing consumer complaints about providing fairness in financial matters, and giving impartiality for consumers' financial products.

The agency is currently run by only one Director, Kathy Kraninger, who was nominated on June 16, 2018, by President Donald Trump. The current Deputy Director is Tom Pahl. The United States President nominates the director and other essential agency heads. Most people currently working at CFPB get their jobs by applying to the job opening at a certain time via the CFOB official website. The applicants post their resumes on the website by keeping in mind the job posting's minimum qualifications. It takes time to assign federal jobs to the applicants since the agency commits to being fair to all applicants and carefully reviews their employment history. The jobs are allotted through the equal employment opportunities rule so that a diverse workforce is included, regardless of race, ethnicity, color, gender, transgender status, or gender non-conformity (Consumer Financial Protection Bureau, n.a.).

The link to the administrative agency's home page is https://www.consumerfinance.gov/. Under scrutiny was the CFPB arbitration rule that allowed the common public to use lawsuits against the financial institutions that did nay wrong with the citizens. There has been a dispute on the fairness of the rule. The findings from the study conducted by CFPB revealed that seven out of eight renowned mobile wireless providers that protected 99.9% of the total subscribers had a compulsory arbitration clause in their agreements. Beyond 90% of the credit card issuers also have arbitration phrases in their indentures with consumers. A study conducted by CFPB found that consumers filed approximately 600 arbitration cases and 1200 federal lawsuits each year on average (Consumer Financial Protection Bureau, 2015). Between the years 2010 and 2012, six different consumer finance markets were victimized by filing cases against them. The arbitrators were forced to award consumers for losses up to $175,000. Under this arbitration rule, an estimated 32 million consumer was eligible for relief by the financial institutions.

After the overturning of CFPB's arbitration rule in 2017, there were no particularly targeted reactions or criticisms seen by the general public. However, some prominent public figures disapproved of the rule's overturning, saying that it was wrong for the consumers to be deterred from having their rightful benefit. A Washington DC nonprofit consumer advocacy group known as Public Citizen spoke against the overturning of the arbitration rule in a tweet that bad bank firms like Wells Fargo would be given a free ticket for conducting fraudulent activities with the customers (Grurevich & Bleemer, 2017). Another consumer watchdog group expressed that this overturn would hurt consumers in great numbers across the states since it is a clear denial of their legal right of asking protection against financial marauders. Major personalities at CNN reported that Senate's vote for making it easier for the banks not to get sued by the common public since combined class lawsuits were prohibited and individual filings were allowed in certain cases, increasing the citizen's suit filing costs even higher (Koch, 2019).

Wells Fargo faced a class action filing that it initially opposed, and the court ruled in its favor. It was deduced that consumers who had filed class filings now had to file individually against the financial institutions to increase their filing costs. This implied that consumers would not be interested in filing upon the compensation, and Wells Fargo would not be obliged anymore to pay $5million if it wanted to; that was a law requirement. When the public and Congress pressurized the firm, Wells Fargo decided to pay $142 million for the class action clearance. This shows a distinction between arbitration and class action suit.

There are mixed reactions about the good or bad effect of overturning CFPB's arbitration rule. The supporters of this decision view this as a victory for both the consumers and the financial institutions since both had to incur high costs in the case filings and the reimbursements that the banks and credit card firms had to pay back to the consumers. The economic costs were high with expensive, frivolous lawsuits that only benefited the tax and trial lawyers. The opponents stated that it was against the public freedom to exercise their rightful action against the financial institutions' misconducts. It would imply allowing financial businesses to jeopardize public welfare and pursue public protection is savaged.

Legal Section

Introduction to Legal Section

The enabling legislation that was the CFPB agency's foundation is The Consumer Protection Act and Dodd-Frank Wall Street Reform (Public Law, 2010). At the beginning of the year 2007, the United States had to undergo a severe financial crisis after the Great Depression (Consumer Financial Protection Bureau, n.a.). The consumers' worst financial conditions were present in shrinking savings, dropping home values, job elimination, and losses in small businesses. The consumers were even forced to enter dishonest loan deals that they could not completely interpret and were left with small amounts of money. In 2009, President Obama found this consumer protection situation disturbing and had to make amendments. Congress passed, and President Obama signed the Dodd-Frank Wall Street reform along with the Consumer Protection Act. According to this act, the current agency named CFPB was founded so that consolidation of all consumer protection matters could occur under one roof. This administrative agency's only goal was to give American consumers the financial protection and authority to look after their financial products and services.

Adjudication verifies individual constitutional privileges and duties by concentrating on the entities and questions relating to prevalent and previous details (Rachlinski, 2005). In determining the case's final result, the court uses current laws and regulations to the case facts and the affected parties. On the contrary, the agencies that rely on rulemaking establish future conduct of groups, classes, or individuals concerned so that legislature is followed. More "due process" is required by rulemaking since participation from the public is guaranteed, deeming it their democratic right. Adjudication is only about the concerned parties and the administrative agency itself; hence, the public is restricted from giving opinions anywhere in the process. Based on this, the CFPB rule came into being with the rulemaking process's help since the decisions were emphasized on society's future conduct. The individual constitutional rights and past happenings are not considered, but due process considers public opinions before the rulemaking. The rule was expelled from Congress that called it unconstitutional.

Statement of Relevant Legal Principles and Rules of Law

CFPB's arbitration rule was noticed and made ineffective on November 22, 2017, according to which the arbitration agreement did not affect (Federal Register, 2017). It was made public in the federal registry on the same date, and publications were made accessible for the citizens for clarifications. Generally, a rule, regulation, or action can be challenged under the Due Process with both of its extensions: procedural due process and substantive due process. The procedural due process prohibits administrative agencies from applying their powers by demanding them to obey procedures when seeking court matters (Williams, 2010). If an unfair procedural due process is observed, the person can challenge the procedural due process by filing a complaint against it or even seeking justice in court so that an order from the court is directed for the government to follow the process while dealing with the concerned person.

The substantive due process gives the state authority to govern certain actions and make legislatures. If a citizen's fundamental rights are undermined, the federal courts have the authority to interfere when the state makes verdicts. Any of the state laws can be challenged rightfully if they violate the constitution of the Court.

The legal elements involved in the court when a decision is to be made equity and equality (Ignatescu, 2013). Equity allows judicial equality to be humanized, so that rightfulness of committing correct actions is done with liberty. The court must finalize decisions with equity and equality without being biased or one-sided so that proportional equality could be maintained between the concerned parties with rightness, and reasonability is non-discriminatory for the aggrieved parties.

The controversial overturned CFPB rule could be challenged under substantive due process since citizens' fundamental rights have been severely damaged when they were prohibited from trying the financial institutions in court if they did any unlawful act. The citizens were barred from voicing their concerns if wrongdoings were observed by financial institutions responsible for protecting their monetary matters. The citizens can take federal courts' help to intervene when the state has decided to reject the general public's vital right.

The controversial CFPB rule has been appealed in the court under the case PHH Corp. vs. Consumer Fin. Prot. Bureau - 881 F.3d 75 (D.C. Cir. 2018) (United States Court of Appeals, 2018). The case's litigants were the Consumer Financial Protection Bureau (CFPB) and PHH Corporation, an American mortgage service providing financial company for over 30 years. PHH challenged the protection of removal of the director of CFPB, mentioning that it unlawfully disturbs the power segregation. When Congress founded CFPB after the US's recession in 2008, it appointed the director with the power of rulemaking and enforcing those rules. Since the agency had a degree of independence and the director is protected by the President of the country for his removal, PHH Corporation challenged the unconstitutional weakness of the President's power. The ruling of the court was that CFPB has all the rights of rulemaking and its implementation.

Legal Conclusion

The administrative agency, CFPB's rule was not legal since it did not provide "due process"; the reason for saying so is that the due process engages the public opinion before rulemaking whereas the overturning of the CFPB's arbitration rule did not engage public opinion and the agency went on to announce its new rule. The general public was banned from taking any combined action against the financial companies except that the new rule did not apply to mortgage companies. The enactment took place grounded on the fact that CFPB had the independent authority of rulemaking. The President also signed the resolution so that the public's combined endeavors to sue any financial institution, especially the banks and credit card companies, could be prohibited. Although CFPB's initial rule was to protect the consumers under the arbitration rule for banks and credit card firms, its foundations were forgotten when its revocation materialized in 2017. The initial CFPB rulemaking transpired for future conduct and safeguard of the consumers so that severe financial crisis could be avoided as was experienced in 2007.

Consumers can be considered as a source of gap-bridging between the business and the society. If consumers are cheated, they would not be protected by the brand unless governed against the unlawful acts. The same defense as required by the consumers when they demanded the safety of their financial products from the banks and credit card companies, and in their contracts, these firms gave the consumer freedom and fairness for trying them in court jointly when they experienced any misconduct. Although this incurred huge costs upon both the sides, the banks, and the consumers, when the cases were appealed in court, it was the consumer's right based on business ethics that the cancellation of the CFPB's arbitration rule snatched away from them.

Ethics Section

Introduction to Law and Ethics

Ethics are a set of moral values for defining how one should behave, and the determination of the correct behavior is ascertained (Candilis, 2002). The foundations of right and wrong are set by individuals so that actions are altered to commit the right thing, referred to as ethics. The social fairness for fulfilling the rights, obligations, and benefits to society through legalized behaviors is encompassed in ethics. The human being's specific virtues are characterized by following the law, and for that, particular correct actions are done, which id deducted as ethical behavior. Additionally, laws are the rules established to govern the society and the stability of their institutions.

The public or government administrator must adhere to the ethical standards since they are connected with the public directly, and ensuring their farness is the moral obligation of a government administrative agency. The code of ethics provides principles for professionalism; leaders of the public agencies and the colleagues can co-work effectively and interdependently for society's welfare (Menzel, 2015). Government administrators' integrity is directly proportional to the firms' ethics and fair operations under their control. The community's trust is gained if rational operations take place under the authority of the government administrator. By keeping in mind these justice terms, the government administrators certify that they are working to better the citizens. Only then will the smooth practices of society occur, and peace can be maintained within the country. Conversely, the business managers do have a social responsibility of being ethical towards their consumers, but they are not bound to work for only society's well-being and maintain peace within the state. Hence, a heightened level of ethical standards is required for government administrators compared to general business managers.

Some people think that law and ethics are the same. In legal positivism, Hart believes that there is no tangible relationship between law and ethics. According to him, if a legal is to be effective, the valid obligational rules should be followed by the society members. Also, leaders must acknowledge the rules of change and adjudication. This theory would only be applicable in a society where the citizens strictly obey rules, and the legislators know that rules of change and adjudication should be accepted. The critics of this theory mention that this was proposed for the only contentment of dividing law and ethics separately; however, it is not possible (Cullison, 1985). Though they do not count as law and ethics the same, they believe that if ethics are not there, if the direction of doing right and wrong is not present, it would be possible to act lawfully and follow the state policy's rules. When natural law exists, the intervention of government stated laws and policies would not be necessary. Natural law implies a certain set of rules accepted as a social fact and has the power to be followed by the citizens; thus, the citizens' actions would be defined by those naturally and socially accepted rules by reasonable people. People would know what right is to be committed and what wrong act to be avoided. The supporters of legal positivism believe that government should have a formal codified set of rules to be enforced and recognized by state authorities.

Under the legal positivism approach, the rule at discussion is ethical since if it is allowed, the arbitration clauses in the financial contracts would be allowed, and the consumers would gain back their right of pursuing in legal courts if wrong is done. It would be considered law-making via rulemaking as ethical standards would be maintained by following the law itself. Thus, by its very nature, the ethics and law would be followed under this theory, so would be CFPB's arbitration rule.

The legal positivism theory cites that the citizens recognize only the government's written set of rules, giving meaning to the decisions. These rules give the governmental bodies the power to exercise their authority on certain areas of the society where needed, especially when some illegal act is being committed. So, legal positivists define that the rules are acknowledged by the public administrator and government authorizes, then they would be nominated as law (Law Jrank.org, n.a.). Also, under the definition of legal positivism, if government authorities do not recognize the social norm, it would not be considered a law. It would then not matter how many people realize it as an established social norm to commit actions legally and what actions should be taken to legitimize behaviors against it unless the state power intervenes. However, this should not be when a responsible administrator has to make decisions by taking into account both legal written rules and social norms. It would be unfair for society if only legal written rules are followed by only obeying the legal positivism approach, and justice is not served on a morality basis by not attending to human needs. An example of this statement can be learned from American colonists who put forth the foundation of their revolt against the British's law on the naturally accepted rule that all men are equal and created by God with certain unchallengeable rights. It would have been unreasonable for a public administrator if he ignored this socially acceptable norm and only view the written law for providing justice to the citizens. Human morals would have been questioned on a responsible administrator, and integrity would be found absent.

Evaluation of Agency's Rule under "Utilitarianism" Ethical Theory

Utilitarianism ethical theory suggests that actions that bring happiness and pleasure should be acknowledged, and actions that bring sadness should not be endorsed. The distinction between right and wrong acts should be justified whether a certain action brings happiness or unhappiness for most people. The proponents of this theory reckon that the critics do not view the overall purpose this ethical theory serves for society. This theory aims to provide a guideline of right and wrong actions for professional, industry, business, and governmental firms which have to make ethical decisions daily (Bowden, 2009). Unfortunately, they do not have appropriate training for moral philosophy. This theory should characterize the context under which they have to make resolutions not to hurt society's fundamental rights. This theory clarifies the right and wrong path for serving the human race in the best possible way by maximizing their welfare. Hence, infringement of one individual's rights for the benefit of a larger portion of the society, such as the financial institutions, would not be right. It indicates that the controversial rule would not have been passed if this ethical theory was followed. It would be appropriate to say that if CFPB's rule was for the happiness of the majority of financial consumers and would have worked for lessening their grief based on their financial loss, then it would have passed.

The groups and individuals affected by the agency's rule can be explained by the table below:

Stakeholders

Explain if negatively impacted by the agency rule

Explain if positively impacted by the agency rule

Citizens or consumers

Ordinary people lost their right to raise their voices against any illegal act committed by financial institutions. Their financial protection was lost.

Bank employees

The court processes were complex, exorbitant, and time-wasting before this rule. Now, this would not be the situation.

Banks

Banks no more faced financial constrain due to mass compensations and the expenses that they had to incur for lawsuits filed by the group of consumers against their unlawful acts.

Trial lawyers

Trial lawyers were not benefited from the rule since many cases would not be seen now, and they would not make money.

Judges

Judges were facing a backlog of an overwhelming number of cases, and some of them did not receive fair judgments. Now, this was not the case under the new rule.

Association of arbitrators

If the arbitration clauses remain absent from the contract, as under the new rule, then they would not be benefitted as they would lose business.

Consumer advocate groups

If arbitration clauses are removed under the new rule, then these groups would not like it since individual consumers would be at a loss

The financial consumers were affected the most by the rule since if they are not counted as a single group and count them individually; they would be innumerable. Consumer advocate groups, the association of arbitrators, and trial lawyers are all negatively affected by the new arbitration rule. Hence, the negative impact would be far greater than perceived. All the other stakeholders, naming banks, bank employees, and judges would be positively impacted by the agency rule. Thus, under utilitarianism ethical theory, if the greatest good is for most stakeholders, then the rule seems unethical.

Evaluation of Agency's Rule under One More Ethical Theory

One more selected theory under which the agency's rule would be scrutinized is Moral Relativism theory. In line with this theory, there is no single established rule for morality (Harman, n.a.). There can be various spectrums on which morality can be defined. For instance, if some actions are not accepted as morally right on the cultural spectrum, they would not be ethical. In other cultures, the same action would be acceptable, hence, deeming it ethical enough. Societies divide the actions depending upon their own acceptable and fixed cultural beliefs, traditions, and practices. Moral standards around the world are deviated based on the respective cultural definitions. It is also believed that societies should accept each other's differing viewpoints about morality and no universally accepted single moral rule. However, some universal attributes, such as honesty and integrity, could be true for all people.

In today's world, where profit maximization is the only sole purpose of political and business firms within society, there is an increased need for more furnished theories of ethics. However, moral relativism provides the basis for such individuals who must inculcate moral judgment in their daily decision-making, such as political and financial firms. In each culture, even in the US culture, it is an established norm and moral that every individual should be given the right to speak out his concerns, especially when anything is done to him. This right is given to the criminal in jail who has to defend himself and has been appointed a lawyer. This right was snatched from the financial consumers when CFPB's arbitration rule came in 2017. It can be inferred that moral relativism is different for all the different stakeholders of the controversial agency rule and have their definitions of morals and ethics. Banks, bank employees, and the judges might perceive it ethical since expenses were saved and time lost in long and complicated cases was saved as well.

On the other hand, consumers were not satisfied since filing cases together against certain financial institutions if they did wrong was no longer applicable. If people were created, they must have the chance to pursue their legal rights. It was ethical and moral on the other spectrum of this theory.

One individual's morality is defined by how he perceives actions as good or bad and what he expects of others based on his own opinions of morals. When the CFPB rule was presented in 2017 under which consumers were not allowed to file combined cases against the financial institutions for doing wrong, consumers thought morality was absent from the agency's rule, deeming it unethical. Moral relativism has different opinions of morality; it is mainly the existence of morally correct ethics opinions, even if they contradictory according to personal thoughts. There is no singular defined principle for morality but the correct standards based on individual desires. Under the light of moral relativism theory, customers devised their own set of beliefs for the agency's rule based on which it was proposed unethical. Simultaneously, government and financial institutions thought the rule to be ethical since it would save lawsuit costs initially incurred in large amounts when consumers filed cases against the credit card companies and banking firms. Those firms had to compensate the customers in hefty monetary amounts that made use of substantial governmental expense. A large amount of money was invested in these cases. Under the light of moral relativism theory, now the agency's rule is ethical for the government and the banking firms.

Personal Thoughts on the Agency's Rule

I feel that this rule was not ethical since the reiteration of these words would not emphasize enough that every individual should have his right to speak against the offenses. Freedom of speech is the individuals' fundamental right as it provides them confidence and a source to progress. For example, a state where the government does not allow the public to speak in any matter would be considered a dictatorship that would be considered harmful to society's welfare. Even in the next elections of a new governmental body, the public might not be willing to vote for new people and even reject paying taxes. The overall impact would be drastic for society's good. Hence, the consumers must be given legal and fundamental right to speak their heart out as they are the ones who have elected the government and supported the other institutions of the society so that they can work in collaboration for citizen's prosperity.

Research has shown that free speech is necessary for bringing change (Index, 2016). People with differing views are good for advancement since various opinions would be put forward, among which a good initiative can be pointed. This initiative can take the shape of a movement within the society as it would have the imperative to change. The right and moral claim to challenge, oppose, and protest gives rise to the free exchange of ideas. Remaining silent when an injustice is being served would be unfair as a human being, either to us or when it applies to anyone else's case (Tchividjian, 2017). It would hurt our morality and values. Hence, speaking up against the unfairness is crucial for society's change. I think depriving the public of speaking against the financial firms would be unfair, and the agency's rule is unethical. Although the rule had saved heavy investments from the consumers and the financial firm's side on the lawsuits that have been in courts for long; however, it would not have been right to rob the humans of their central claim.

Community Welfare Section

Community welfare means aiming to provide social protection needs (Lee, Majer & Kim, 2019). It provides the necessary help regarding income, services, or other life support systems, especially for the underprivileged people like the aged, poor, disabled, students, and voluntary workers, including caregivers. The government facilitates community welfare service centers to assist these socially disadvantaged people in promoting equity, providing opportunities in the community for advancement, and enhancing society's collective well-being. The quality of life of the individuals is improved by giving the required services to the community. Recently, there is a rising gap amid the rich and poor, and there is now a rising need for welfare services for the needy. The explosive demand for a welfare delivery system has to be managed by the government, which requires the strong and systematic establishment of the policies and frameworks.