The Consumer Financial Protection Bureau is a watchdog group that adopted a rule on July 10 that has the potential of costing banks and other financial firms billions of dollars. This new rule, would allow consumers to band together in class-action lawsuits. Both the Trump administration and House Republicans have lobbied to rein in the consumer finance agency as part of a larger effort to lighten regulation on the financial industry, reports The New York Times.
“A cherished tenet of our justice system is that no one, no matter how big or how powerful, should escape accountability if they break the law,” director of the consumer agency Richard Cordray said in a statement.
A 1996 law, the Congressional Review Act, had been rarely used before the current Congress used it to reverse 14 rules from the Obama administration. Lawmakers have about 60 legislative days to overturn the rule blocking mandatory arbitrations.
Republican Resistance
But as much as Republicans disagree with the consumer protection agency, they may find it hard to kill a rule that could have wide populist appeal. Across the United States, judges, prosecutors and regulators have sharply criticized arbitration clauses for permitting corporations to circumvent the courts and for removing tools to fight abusive business practices, reports The Times.
The new rule would roll out a series of legal maneuvers undertaken by major American companies to block consumers from going to court to fight potentially harmful business practices. The Consumer Financial Protection Bureau was formed in 2010 as part of the Dodd-Frank regulatory overhaul to ensure the rights of millions of Americans in the fallout from the mortgage crisis.
The rule “should be thoroughly rejected by Congress under the Congressional Review Act” said Representative Jeb Hensarling. He is the Texas Republican at the forefront attempting to weaken the consumer agency, according to the Times.
The rule is mostly unchanged from when it was issued in draft form in May 2016 and the Bureau began soliciting comments from industry. It is that sort of independence that has particularly angered the Republicans. Mr. Hensarling has sent a letter last week, threatening contempt proceedings against Mr. Cordray, faulting the agency for neglecting to comply with a subpoena related to its work on the arbitration issue.
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Chamber of Commerce Critical of Agency
The Chamber of Commerce agreed with Mr. Hensarling’s comments, saying, “The C.F.P.B.’s brazen finalization of the arbitration rule is a prime example of an agency gone rogue.” The chamber and other pro-business groups have berated the rule as nothing more than a gift to class-action attorneys, who tend to be Democratic donors, The Times reports.
Private Arbitration
For decades, financial institutions, led by credit card companies, found a way to use the fine print of their contracts to force consumers into private arbitration, a process in which borrowers must go up on their own against powerful companies with deep pockets. Most people simply gave up their claims, since they could not band together in a class and pool their resources, thereby never making it to arbitration.
All that could be changed when it comes to consumer finance, with the new rule. The protections would not apply to existing accounts, but consumers could pay off old loans and get new accounts that would fall under the new rule. The rule does not explicitly outlaw arbitration, but industry attorneys say it will basically kill the practice.
Alleged Benefits of Arbitration
 “If this rule goes into effect, what we are going to see is a huge avalanche of litigation and a loss of the benefits of arbitration,” said Alan S. Kaplinsky, a lawyer with the firm Ballard Spahr in Philadelphis who is considered by many to be the father of arbitration clauses. Mr, Kaplinsky opposes the rule and believes arbitration offers a faster and more efficient way to resolve legal disputes.
In a series of articles in 2015, The New York Times assembled its own database of arbitrations that revealed that few people ever go to arbitration. In financial disputes, the numbers are especially surprising. In its investigation, The Times found that from 2010 to 2014, only 505 consumers, a small amount of the tens of millions of Americans whose financial contracts have arbitration clauses, went to arbitration over $2,500 or less.
That reluctance is the reason one federal judge noted in an opinion that “only a lunatic or a fanatic sues for $30.” Companies, by banning class actions, essentially squashed challenges to practices such as predatory lending, sexual discrimination, wage theft, and medical malpractice, said The Times.
Supporters of the new rule say that class actions can push companies to get rid of questionable business practices. Big banks, as an example, had to pay over $1 billion to settle class-action lawsuits that started in 2009 and accused them of compromising checking account policies to maximize the number of overdraft fees they could charge customers. Subsequent to the litigation, seven of the banks involved adopted arbitration clauses in their contracts, The Times reports.
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