Senate repeals rule that allows consumers to band together and sue

Move allows banks to keep blocking group lawsuits and enforce mandatory arbitration

Fred O. Williams
Senior Reporter
Expert on consumer credit laws and regulations

Senate repeals consumer protection that bars mandatory arbitration

Banks and other financial services can continue to block their customers from banding together in court, after the U.S. Senate voted late Tuesday night to repeal a rule that would have restricted mandatory arbitration.

“This vote is all about a consumer’s right to a day in court, pure and simple,” said Sen. Sherrod Brown, D-Ohio.

The Senate voted mostly along party lines 51 to 50 to repeal the rule under Congressional Review Act, with Vice President Mike Pence casting the tie-breaking vote at 10:11 p.m. EDT. The House previously voted for repeal July 25, and White House approval is expected.

‘An attack on American consumers’
Consumer groups, which had supported the arbitration rule, reacted with outrage.

HOW TO KEEP RIGHTS TO COURT
  • In credit cards, Bank of America, Capital One and Chase Bank don’t require cardholders to sign away court rights in mandatory arbitration clauses.
  • Some card issuers that do have no-class-action clauses in their agreements let new cardholders opt out of the requirement – if they do so in writing within a set time period after opening the account.
  • These issuers include American Express, Citibank, Discover and the store card issuers Synchrony and Comenity Bank. Follow these instructions to opt out of arbitration.
  • For checking accounts, most large banks require arbitration and prohibit class actions for account holders.
  • However, many community banks – and most credit unions – do not use arbitration clauses in their contracts with customers, research by the Consumer Financial Protection Bureau found.
HOW TO KEEP RIGHTS TO COURT
  • In credit cards, Bank of America, Capital One and Chase Bank don’t require cardholders to sign away court rights in mandatory arbitration clauses.
  • Some card issuers that do have no-class-action clauses in their agreements let new cardholders opt out of the requirement – if they do so in writing within a set time period after opening the account.
  • These issuers include American Express, Citibank, Discover and the store card issuers Synchrony and Comenity Bank. Follow these instructions to opt out of arbitration.
  • For checking accounts, most large banks require arbitration and prohibit class actions for account holders.
  • However, many community banks – and most credit unions – do not use arbitration clauses in their contracts with customers, research by the Consumer Financial Protection Bureau found.

“Voting to allow banks and other financial institutions to rip off customers with impunity is a savage attack on American consumers,” Public Citizen President Robert Weissman said in a statement. He called on President Trump to veto the joint resolution, adding he had little hope of success.

“Reckless Wall Street chiefs and predatory payday lenders have now won a congressional green light to pick consumer pockets with unfair and deceptive fees and practices,” U.S. Public Interest Group program director Edmund Mierzwinski said in a statement.

American Bankers Association CEO Rob Nichols applauded the vote, saying in a statement that it “puts consumers first rather than class-action lawyers.”

The U.S. Consumer Financial Protection Bureau published its final rule on arbitration July 10. It outlawed fine print in contracts that blocks customers from joining group or class-action lawsuits. Companies could still require arbitration for one-on-one disputes, but would have to share data about the outcome of those proceedings.

Groups representing military service members, labor and anti-poverty advocates, as well as consumer advocates, supported the rule, while bank industry groups lined up against it.

Large scope of arbitration clauses
In the financial sector, arbitration clauses cover many consumers without their knowing it, the CFPB found in a 2015 study. In the credit card market, about 53 percent of balances are subject to mandatory arbitration clauses. In terms of checking accounts, 44 percent of deposits are covered, while 99 percent of payday lenders in the study required arbitration.

The CFPB rule took aim at financial companies, but arbitration clauses are also used to block the courthouse door in cellphone contracts, employment agreements, homebuilder contracts, nursing homes and other consumer agreements. The 2010 Dodd-Frank Act that created the consumer protection bureau charged the bureau with studying arbitration requirements’ effect on consumers and regulating them if necessary.

Lacking access to court reduces consumers’ compensation in disputes with corporations, the CFPB’s study found.

Some consumers are protected by law from arbitration clauses. The Dodd-Frank Act bans mandatory arbitration in mortgage contracts. The Military Lending Act forbids mandatory arbitration clauses in loan agreements with service members and their families.

Democrats and consumer advocate groups supported extending the protections further.

“It is simply wrong to give bad corporate actors immunity from lawsuits, from the millions of customers they harmed,” Sen. Jack Reed, D-R.I., said during Senate floor debate. Arbitration critics point to the use of the clauses by Wells Fargo and Equifax to shield themselves from customers’ legal action.

In recent days the repeal effort got a push from reports by the Office of the Comptroller of the Currency and the Treasury Department, saying restricting arbitration could raise borrowing costs for consumers, as banks recover higher legal costs. CFPB Director Richard Cordray, an Obama appointee, continued to back the rule and said the threat of higher consumer costs was based on a mischaracterization of the CFPB’s study.

The repeal vote was “a giant setback for every consumer in this country,’’ Cordray said in a statement. “As a result, companies like Wells Fargo and Equifax remain free to break the law without fear of legal blowback from their customers.’’

“[The repeal vote is] a giant setback for every consumer in this country. As a result, companies like Wells Fargo and Equifax remain free to break the law without fear of legal blowback from their customers.”

Customers versus banks
The vote came after debate on the Senate floor in which Democrats cast supporters of arbitration as favoring banks over their constituents.

“Banks and their lobbyists have got the gall to claim they want to kill the rule because it’s bad for their customers,’’ Sen. Elizabeth Warren, D-Mass, said.

Sen. Mike Crapo, R-Idaho, author of the repeal bill in the Senate, responded that his aim is to stop the rule from driving dispute resolution into class-action litigation instead of other forums, including arbitration and small claims courts.

“This is a very clear move to drive our dispute resolution into class action,” Crapo said. The CFPB study showed that class-action attorneys collected $424 million, a quarter of total rewards. The CFPB director “is obviously on the side of the litigation bar,” Crapo said. There’s no evidence that companies without a class-action waiver treat their customers better or abide by the law more closely than others, he said.

Sen. Jeff Merkley, D-Ore. related his own experience with a small-dollar claim after finding an unexplained $10 charge on one of his monthly bills. The unnamed company offered to reimburse him for one month, but the charge had started being added six months ago. “That's $50 – you can't go to court for $50,” Merkley said. Class actions, although they often yield low payouts to consumers, are a way to deter and compensate for such claims that are too small for consumers to litigate individually.

In the credit card market, some issuers don’t use mandatory arbitration clauses in their contracts. Others let customers opt-out of arbitration if they send an opt-out letter within a set time period after opening the account.

The rule, which would have taken effect in March 2018, cannot be introduced again without specific approval from Congress. The Congressional Review Act gives Congress 60 legislative days to repeal regulations with a simple majority in both chambers. Two Republicans, Lindsey Graham of South Carolina and John Kennedy of Louisiana, joined all 48 Democrats in voting against the repeal bill.

See related: Credit card arbitration: What it is, how it works, Will banks raise APRs if stripped of legal shield provided by arbitration?


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Updated: 11-20-2017