New consumer protection rule shields class-action suits against banks; Congress may block it

The Consumer Financial Protection Bureau has issued a new rule that would ensure consumers can bring class-action lawsuits against banks instead of being forced into private arbitration, though Congress may seek to scrap the rule before it takes effect.

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.

Bureau Director Richard Cordray said Monday that class-action bans force consumers to seek redress on their own, often for relatively minor damages. Many simply don’t bother.

“Our new rule will stop companies from sidestepping the courts and ensure that people who are harmed together can take action together,� Cordray said.

Some consumer advocates had hoped that the bureau would go further and ban arbitration agreements altogether, though advocacy groups largely praised Monday’s move as a win for consumers.

Lisa Donner, executive director of Americans for Financial Reform, said the rule would “stop Wall Street and predatory lenders from ripping people off with impunity, and make markets fairer and safer for ordinary Americans.�

George Slover, senior policy counsel for Consumers Union, called it “an important step to restore some basic rights that consumers need and deserve.�

Industry groups, though, immediately cried foul, saying the rule would cost businesses and consumers and urging Congress to undo the rule.

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.

Leaders from the U.S. Chamber of Commerce are already urging Congress to use the act to kill the arbitration rule.

“We will consider every approach to address our concerns, and we encourage Congress to do the same — including exploring the Congressional Review Act,� the Chamber of Commerce said in a statement Monday.

Rep. Jeb Hensarling, a Texas Republican and vocal opponent of the CFPB, said the rule would “thrill class-action trial attorneys� and said Congress should use the CRA to reverse the rule.

“As a matter of principle, policy and process, this anti-consumer rule should be thoroughly rejected by Congress under the Congressional Review Act,� Hensarling said in an emailed statement.

Cordray acknowledged that the rule might be undone, saying he is “aware of those parties who have indicated they will seek to have the Congress nullify this new rule,� but said the rule was in the best interests of consumers.

Backers of the rule argue that arbitration is weighted in favor of companies, who generally pay for the proceedings. They also note that 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.

L.A. City Atty. Mike Feuer said class actions are a vital way of addressing illegal or unethical practices that cost little for an individual consumer but that, across thousands or millions of consumers, amounts to real money.

“Today’s CFPB action is a major victory for every American who’s been scammed by a financial institution but blocked from getting real relief because the amount pilfered from that one consumer, taken alone, just didn’t justify the fight,� he said.

But business groups expect the rule, if it takes effect, will only result in a bevvy of frivolous suits. They point to a CFPB study that estimated the rule would result in the filing of more than 6,000 additional class-action cases over the next five years.

“The vast majority of these cases aren’t like Wells Fargo where you need to make a whole bunch of consumers whole,� said David Hirschmann, chief executive of the U.S. Chamber Center for Capital Markets Competitiveness. “The vast majority are mimeographed lawsuits designed to extract quick settlements.�

Alan Kaplinsky, a partner at law firm Ballard Spahr who pioneered the use of consumer arbitration agreements, acknowledged that there are some cases where arbitration will not result in an institution correcting bad practices. But he said those are cases where regulators, not class-action lawsuits, should correct matters.

“Those are the kinds of cases the CFPB has been very good in dealing with,� he said. “They don’t like to deal with individual, one-off disputes. They’re looking for systemic issues.�

He also said that if arbitration agreements can no longer protect financial companies from class-action suits, companies are likely to get rid of arbitration programs altogether, forcing customers with small, unique disputes to find lawyers and take banks to court.

“Most companies that use arbitration will abandon it,� he said. “If they have to defend class actions, most of which are meritless, they won’t continue to subsidize the arbitration process. They’ll say, ‘If a customer has a claim against us and it doesn’t get resolved informally, let them sue us.’ �

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UPDATES:

4:20 p.m. This article was updated with additional comments. It was originally published at 12:45 p.m.