Senate overturns the CFPB’s anti-arbitration rule

Inside Subprime: October 27, 2017

By Andrew Tavin

Vice President Mike Pence broke a 50-50 tie in the Senate last Tuesday in favor of striking down a rule that would have prevented financial institutions from forcing customers into individual arbitration to resolve complaints. The rule was issued by the Consumer Finance Protection Bureau in July and was designed to protect consumers’ ability to band together in class action lawsuits.

Financial institutions regularly hide clauses in their contracts that require customers to waive their right to pursue outside legal action. This has led to situations where customers have limited options when faced with negligent or malicious behavior, like the recent Wells Fargo and Equifax scandals.

As the need for a tiebreaker makes clear, the rule was closer to passing through the Senate than it was when the House voted against it back at the end of July. The vote was nearly entirely on party lines, with Republicans voting against the CFPB rule and Democrats voting for it. Two Republicans, Lindsey Graham of South Carolina and John Kennedy of Louisiana, joined the Democrats in voting for the rule.

Various spokespeople for the financial industry applauded the vote, claiming that individual arbitration provides better results for consumers. Thomas Donohue, CEO of the Chamber of Congress, a business advocacy group, was quoted saying the anti-arbitration rule would have “benefited the class-action trial bar at the expense of American consumers and businesses alike.”

Still, it’s difficult to see how limiting the options available to consumers works to their benefit. Consumers still could have pursued individual arbitration under the CFPB rule if they believed it was likely to get them better results. Striking down the CFPB means banks, credit card companies, lenders, and credit agencies can make that decision for their customers, likely to the benefit of those institutions.

Indeed, Richard Cordray, head of the CFPB, said that striking down the rule “preserves a two-tiered justice system where banks can have their day in court but deny their customers the same right.” He urged the president to veto the measure, however, it is widely assumed that Trump will follow Congress’s lead.

Still, there is hope for consumers who don’t want to be forced to sign away their day in court. California recently passed a law similar to the CFPB rule, so residents of the state will still see the benefits of the likely doomed regulation. Should other states follow California’s example, more and more American consumers may still avoid being forced into individual arbitration.

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