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Tuesday, October 24, 2017

Comments

Student

Ted,
Per the OCC paper, the sample size in both studies was 308,737 observations for which the total cost of credit was calculated. The number of variables included in the regression was not egregious; given the structure of the analysis there is no credible economist out there that would call such a sample small.

Jeff Sovern

Personally, I am not persuaded by the argument that credit card issuers haven't gone through the hassle of adding arbitration clauses because (1) courts formerly didn't enforce arbitration clauses; and (2) the Bureau will invalidate them anyway. I don't see why it would be a hassle to amend the agreements to be used for new customers because the issuer could simply add a new clause to the contract, which consumers don't read anyway. As for existing customers, many issuers retain the right to add new terms simply by sending them to cardholders (so called "bill-stuffers"); if the customer continues to use the card after receipt of the new terms, the customer is deemed to have accepted the new terms. The issuer can even include the new terms with the bill to avoid the expense of an additional mailing. If the reduced prices are as dramatic as the OCC claims, that hassle would be well worth incurring. While some courts have refused to enforce arbitration clauses, plenty of others have, including the United States Supreme Court. That is probably one reason why roughly half of all credit card issuers use arbitration clauses. As for the Bureau, it was not obvious to me that the Bureau would invalidate them, though I hoped they would; indeed, I heard a leading industry lawyer as recently as last spring predict that the Bureau would not issue its rule. Given the challenges that rule faces, including a CRA challenge and litigation, it remains unclear to me that the rule will go into effect, though again I hope it will.

Ted F

Benefits of arbitration are reduced because of litigation and regulatory uncertainty. It's only very recently that courts have started following the law and enforcing the clauses, and they still do so inconsistently. It's rational for a bank to decide that an arbitration clause isn't worth the hassle if it's just going to add litigation expense to put the entity right back where it would be in the first place without a clause or if it will be retroactively invalidated by a regulator who made its biases clear.

The basis for Frank's claim that "there probably is an effect" is the CFPB's own data, which showed a p-value of 0.88. The CFPB then dishonestly characterized this as "There is no effect" and "There is no evidence of an effect," rather than "We have a small sample size that shows an effect, but can't be 100% certain that this isn't noise in the data." Given the large magnitude of the effect, and that there was a greater likelihood that the effect was larger than 6% than that the effect was 0 (and a better than even chance from the data that the effect was greater than 3%), the CFPB's approach to its own statistics has been politicized and irresponsible.

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