The Consumer Financial Protection Bureau banned legal contracts that prevent consumers from filing class-action lawsuits against their credit card companies and banks, a rule that could affect tens of millions of Americans and cost businesses billions of dollars.
The mandatory arbitration rule, released today after more than a year of consideration, sets up a battle between the bureau and Congress, where Republicans are all but certain to try to kill the rule with a majority vote.
“I am, of course, aware of those parties who have indicated they will seek to have the Congress nullify this new rule,” CFPB Director Richard Cordray told reporters. “My obligation as the Director of the Consumer Bureau is to act for the protection of consumers and in the public interest.”
The rule prevents banks, credit card companies, prepaid card issuers and other financial providers from using contract language to deny customers the right to sue as a group. That legal tactic, known as a class-action lawsuit, gives individuals a way to seek redress in court even over small-dollar complaints such as bank overdraft or late fees.
Consumer groups say the political wind is at their back.
The Congressional Review Act, which allows Congress to overturn regulations, can be used only within 60 legislative days of a rule’s publication, meaning lawmakers would have to move fast.
Furthermore, some lawmakers might be reluctant to overturn the rule, with last year’s Wells Fargo scandal involving fake customer accounts still fresh in the public’s mind.
“The anger on that has been building for 10 months,” said Amanda Werner, a campaign manager at Americans for Financial Reform and Public Citizen. “We’re actually feeling pretty confident.”
The rule is a huge victory for trial lawyers, who have been challenging mandatory arbitration contracts in court and through state and federal legislation since the wide adoption of the practice in the 1980s.
Cordray, whose term expires next year, might be considering an early departure from his post so he can run for governor in his home state of Ohio. Today’s rule could benefit him even if Republicans overturn it.
"Politically, he probably figures it’s a win-win for him," said Alan Kaplinsky, a partner at Ballard Spahr and critic of the rule. "If this thing is able to hold up, it’ll be an achievement he can tout. Even if it doesn’t hold up, he can blame it on the Republicans."
It’s not a given that Republicans have the votes to override the rule. After the 2008 financial collapse, plaintiffs’ lawyers won language in the Dodd-Frank Act to strike mandatory arbitration clauses from mortgage contracts and require the bureau to study the issue.
A 2015 report from the bureau found that consumers were generally unaware of the dispute resolutions required by their credit cards and other providers. But it also concluded that arbitration made consumers less likely to be compensated when they suffer harm.
The American Bankers Association, Credit Union National Association, Electronic Transactions Association, Structured Finance Industry Group and other trade groups condemned the rule. The U.S. Chamber of Commerce called it politically motivated and is considering its own lawsuit against the agency.
“Arbitration is not a right-left thing. The divide is who gets the fees, the consumers or the lawyers,” said David Hirschmann, president and CEO of the Chamber Center for Capital Markets Competitiveness. “The next time any consumer gets one of those letters that says ‘Congratulations, you’re getting a coupon,’ ask them if they feel like they got their day in court.”
The rule applies to providers of credit cards, bank accounts, auto leases, payment processing, check cashing and other services. It affects only accounts signed 180 days after the law goes into effect.
Under the rule, companies may still bind customers to arbitration over individual disputes. The bureau today said it will begin monitoring those proceedings for any developments that “may warrant further Bureau action.”