U.S. Treasury says consumer agency's arbitration rule is misguided

WASHINGTON (Reuters) - A U.S. financial regulator's rule banning banks and credit card companies' ability to prevent customers from banding together to sue them relies on insufficient research and is misguided, according to new analysis from the U.S. Treasury Department.

The Consumer Financial Protection Bureau's (CFPB) rule abolishing "mandatory arbitration clauses" was released on July 10, and was immediately threatened by Republicans in Congress and President Donald Trump's administration.

In its report, the Treasury said the CFPB failed to meet its statutory requirements in analyzing the need for the ban and in drafting the rule.

"The bureau failed to meaningfully evaluate whether prohibiting mandatory arbitration clauses in consumer financial contracts would serve either consumer protection or the public interest," the Treasury said in its report.

Mandatory arbitration clauses block customers from filing or joining a class-action lawsuit and appear in contracts for a wide variety of financial products.

The CFPB, which is still run by officials picked by former President Barack Obama, dismissed the Treasury's claims while defending its work. The rule takes effect for new contracts in spring 2019.

"The report by the Treasury Department rehashes industry arguments that were analyzed in depth and solidly refuted in the final rule," said agency spokesman Sam Gilford in a statement to Reuters. "Banks, credit unions, and other companies file class action lawsuits to pursue justice when they are harmed as a group, and our rule restores consumers’ right to do the same."

The Treasury argues the CFPB failed to consider all the costs associated with its new rule, arguing that consumers may see minimal benefits from engaging in class-action lawsuits as opposed to arbitration. It also says the rule could expose businesses to frivolous lawsuits, and the regulator should have considered other options, such as improved disclosure in contracts.

The regulation has been hailed by consumer advocates and liberals such as Senator Elizabeth Warren as a critical consumer protection against corporate wrongdoing. Republicans and the business community regard it as unnecessary and unhelpful.

Since the rule was published, the CFPB and another bank regulator, the Comptroller of the Currency, have exchanged testy letters, with each claiming the other has engaged in shoddy analysis regarding the rule's impact.

The Treasury does not call for the rule to be repealed or otherwise defeated, but the analysis will likely serve as ammunition for congressional Republicans and the business community who are attempting to undo it. Republicans in the U.S. Senate are trying to garner enough support to pass a resolution that would repeal the rule, after a similar measure passed in the U.S. House.

Five major business groups filed a lawsuit in a Texas court challenging the rule in September. That case is still pending.

(Reporting by Pete Schroeder; Editing by Susan Thomas and Chizu Nomiyama)