The Office of the Comptroller of the Currency has released a report challenging the Consumer Financial Protection Bureau’s interpretation of an arbitration study.
The CFPB proposed its final version of the rule banning mandatory arbitration agreements – which applies mostly to consumer financial products like credit cards – in July.
Economists from the OCC examined a study used by the CFPB to support their claims that banning such clauses would have a low impact on credit costs. The CFPB didn’t find “any statistically significant evidence of increases in the cost of credit to consumers associated with banning mandatory arbitration,” the OCC said.
The OCC report, however, says “the data, analysis, and results … indicate a strong probability of a significant increase in the cost of credit cards as a result of eliminating mandatory arbitration clauses.”
The exact size of that increase is uncertain, the OCC said, but there is a high probability that the Total Cost of Credit will increase, with an expected increase of 3.43 percentage points. There is an 88 percent chance of the total cost increasing as a result of the final rule, and a 56 percent chance that costs will increase by 3 percentage points or more, the OCC said.
Both the OCC and the CFPB analyses were based on a working paper published on SSRN.com by Alexei Alexandrov “Making firms liable for consumers’ mistaken beliefs: theoretical model and empirical applications to the U.S. mortgage and credit card markets.” For the paper, Alexandrov conducted a study of the effect of banning mandatory arbitration agreements on the provision of credit card services based on data before and after a settlement lawsuit in 2009.
Alexandrov conducted statistical analysis of credit card data to estimate price increases. While he found the results of his analysis were statistically insignificant and he could not rule out no costs to consumers, Alexandrov was careful to point out that he could not rule out economically significant costs.
The OCC’s analysis “confirms Alexandrov’s results using his assumptions and specification and elaborates on his comments about the economic significance of introducing additional financial liability in credit card markets,” the report said. “Consumers face significant risk of a substantial rise in the cost of credit.”