#CFPB : Senate Kills Arbitration Rule Allowing Class-Action Lawsuits Against Banks

by Ike Obudulu Posted on October 25th, 2017

Washington DC, USA: Senate Republicans voted on Tuesday to strike down the Consumer Financial Protection Bureau, CFPB, arbitration agreements rule that would have ensured consumers can bring class-action lawsuits against banks and other financial institutions, instead of being forced in many cases into private arbitration.

The move by the Senate followed a similar action by the House in July to rescind the rule. President Trump is expected to sign the repeal legislation, providing a major victory for the financial industry. Vice President Mike Pence cast the deciding vote after the Senate tied 50-50.

The overturning of the rule, with Vice President Mike Pence breaking a 50-to-50 tie, will further loosen regulation of Wall Street as the Trump administration and Republicans move to roll back Obama-era policies enacted in the wake of the 2008 economic situation. By defeating the rule, Republicans are dismantling a major effort of the Consumer Financial Protection Bureau, the watchdog created by Congress in the aftermath of the 2008 mortgage mess.

The White House immediately released a statement in support of the Senate vote:

“President Donald J. Trump applauds the Congress for passing H.J. Res. I I l, Disapproving of the Consumer Financial Protection Bureau’s (CFPB) Arbitration Agreements Rule. According to a recent report by the Department of the Treasury, the evidence is clear that the CFPB’s rule would neither protect consumers nor serve the public interest. Rather, under the rule, consumers would have fewer options for quickly and efficiently resolving financial disputes. Further, the rule would harm our community banks and credit unions by opening the door to frivolous lawsuits by special interest trial lawyers. By repealing this rule, Congress is standing up for everyday consumers and community banks and credit unions, instead of the trial lawyers, who would have benefited the most from the CFPB’s uninformed and ineffective policy.”

For decades, credit card companies and banks have inserted arbitration clauses into the fine print of financial contracts to circumvent the courts and bar people from pooling their resources in class-action lawsuits. By forcing people into private arbitration, the clauses effectively take away one of the few tools that individuals have to fight predatory and deceptive business practices. Arbitration clauses have derailed claims of financial gouging, discrimination in car sales and unfair fees.

The new CFPB rule written by the consumer bureau in July, which was set to take effect in 2019, would have restored the right of individuals to sue in court. It was part of a spate of actions by the bureau, which has cracked down on debt collectors, the student loan industry and payday lenders.

The rule, which has been years in the making, would not completely ban arbitration clauses — agreements in consumer contracts that say disputes between companies and customers must be dealt with privately rather than in court. Rather, the rule, which would not take effect until March, would only ban arbitration agreements that block groups of consumers from bringing class-action cases.

The consumer bureau has unusually broad authority — and autonomy from both the White House and Congress — to enforce existing federal laws and write new regulations, like the arbitration rule. That independence has rankled Republicans and other federal agencies.

Under the Congressional Review Act, Republicans had roughly 60 legislative days to overturn the rule. The House passed its own resolution in July.

The Congressional Review Act, or CRA, gives Congress the power to scrap some federal rules within 60 days of the date they take effect. The House and Senate this year used the act to reverse a handful of new federal rules — dealing with education, the environment and public lands — enacted in the waning days of the Obama administration.

The vote was a win for the Republican party that has struggled to deliver on its conservative legislative priorities. Last month, Senator Mitch McConnell of Kentucky, the majority leader, failed to drum up the support needed to overturn President Barack Obama’s signature health care law.

Arbitration is weighted in favor of companies, who generally pay for the proceedings. Because arbitration is private, it allows companies to deal with issues quietly without having to fix widespread problematic practices.

Case in point: Wells Fargo & Co. for years successfully used its arbitration clause to block lawsuits filed by customers alleging unauthorized accounts had been opened in their names, potentially allowing those practices to persist.

The bank recently agreed to settle some class-actions suits, but not until the CFPB, the Office of the Comptroller of the Currency and the Los Angeles city attorney’s office fined the bank over those practices. Even in the cases that the bank settled, it argued that the plaintiffs could not sue because of arbitration clauses.

Author

Ike Obudulu

Ike Obudulu

Versatile Certified Fraud Examiner, Chartered Accountant, Certified Internal Auditor with an MBA in Finance And Investments who has both worked for and consulted with some of the world's largest companies on main street and wall street in over 20 countries, Ike brings his extensive reporting and investigations experience to bear on his role as Chief Editor.
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