Credit Unions Squeezed by CFPB’s One-Size-Fits-All Arbitration Rule

The late college basketball coach Jerry Tarkanian used to have a theory about the NCAA’s double standard for rule enforcement — that it picked on smaller schools but protected the power programs. As he put it: “The NCAA is so mad at Kentucky, it’s going to give Cleveland State two more years of probation.”

With this in mind, one has to wonder what Coach Tark would say about the recent regulations that appear to drop an undeserved hammer on America’s credit unions while letting the bandits of Wall Street get a pass.

To many Americans, credit unions and banks are flip sides of the same coin. They’re both financial institutions, so they are pretty much the same thing, right?

Wrong. While they share many similar traits, banks and credit unions can be as different as night and day. So why are the same regulations applied to both?

Credit unions, banks and other financial services providers are all subject to the same one-size-fits-all rules by the Consumer Financial Protection Bureau even though they have unique sizes, structures and motivating factors. This was obvious in the CFPB’s recent arbitration rule, where not-for-profit institutions owned by their members are lumped in the same rule-making with the biggest banks on Wall Street — a great disservice to 110 million consumers who are credit union members.

Disputes between credit unions and their member-owners are infrequent, as evidenced by the high ratings the credit union sector continues to receive for outstanding customer service year after year. However, in the rare instance when a dispute between a credit union and a member does arise, the credit union’s structure as a member-owned financial cooperative empowers it to quickly and amicably resolve the dispute.

Credit unions and banks are different, yet the arbitration rule treats credit unions the same as a self-admitted bad actor like Wells Fargo. The big banks have been abusing the system for years, treating their customers like cattle in the stockyards. And while we applaud the federal government’s belated attempts to rein them in, this is yet another occasion where a surgical scalpel is needed, but a broad sword is being used.

Rather than addressing any actual problems, the CFPB’s arbitration rule has created an environment for credit union members to act against their own best interest. The rule encourages trial lawyers to engage consumers in costly and resource-depleting litigation. For a credit union member, that means the arbitration rule creates a greater likelihood that money will come out of their own pockets to pay for trial lawyers.

Plaintiffs in class-action litigation may win on paper, but the payday trial lawyers sell to their clients rarely sees the light of day. Rather, these lawsuits are known for padding the pockets of lawyers while consumers receive something as minuscule as a coupon. Meanwhile, the credit unions that have arbitration clauses have found consumer benefits because disputes are resolved more quickly and awards yield fair results.

One-size-fits-all rules don’t make sense for financial services providers. The House has taken steps to address the flawed arbitration rule, and now it’s time for the Senate to act. Credit unions and their members overwhelmingly support congressional efforts to rescind the CFPB’s arbitration rule, and we urge Majority Leader Mitch McConnell to take up this important issue soon.

Jim Nussle is the president and CEO of the Credit Union National Association. Nussle has also served as a GOP congressman, House Budget Committee chairman and director of the Office of Management and Budget.

Morning Consult welcomes op-ed submissions on policy, politics and business strategy in our coverage areas. Updated submission guidelines can be found here.

Morning Consult