More than a dozen U.S. banks and business groups sued the Consumer Financial Protection Bureau on Friday in a last-ditch effort to block a new rule allowing consumers to band together and sue their credit card companies and other financial institutions.
The lawsuit, filed in the Northern District of Dallas, calls the structure of the CFPB — a watchdog agency established in response to the 2008 financial crisis — "unconstitutional" and argues that the rule it wants to impose on U.S. businesses will not help consumers.
The industry's complaints center on a new CFPB rule addressing the fine print in many of the agreements that consumers sign when they apply for credit cards or bank accounts. These agreements typically requires them to settle any disputes they have with the company through arbitration, in which a third party rules on the matter, rather than going to court or joining a class-action lawsuit.
The rule would weaken a company's ability to make arbitration mandatory, allowing more people to file or join a lawsuit to press their complaints.
But Friday's lawsuit — filed on behalf of the U.S. Chamber of Commerce and the American Bankers Assn., among other groups — says the change would actually hurt consumers. "Arbitration gives consumers the ability to bring claims that they could not realistically assert in court, including the small and individualized claims that they care the most about," the lawsuit says. "In contrast, class-action litigation is significantly less effective than arbitration in addressing consumer claims."
The CFPB, which declined to comment on the lawsuit, has repeatedly defended the rule as a necessary protection for consumers. By blocking group lawsuits, arbitration clauses eliminate a "powerful means to get justice when a little harm happens to a lot of people," CFPB Director Richard Cordray wrote in a recent opinion piece in the New York Times. The rule may cost banks $1 billion a year, but the industry made a record $171 billion in profit last year, he said.
"It is the height of hypocrisy for companies to say they're helping consumers by closing off the very same legal option they use when they've been wronged," Cordray wrote.
Wall Street had hoped Congress would squash the rule before it went into effect later this year. Republicans in the House passed legislation to block the rule this summer, but the Senate has struggled to take up a similar bill. With tax-overhaul proposals now taking up much of lawmakers' attention, opportunities to push through the measure in time are dwindling, industry officials have said.
"This baseless legal challenge is a desperate move after their Senate repeal effort ran into massive resistance this week," Amanda Werner, arbitration campaign manager for Americans for Financial Reform and Public Citizen, said in a statement.
If businesses are forced to comply with the rule, they "will incur substantial, long-lasting, and largely unrecoverable costs," the lawsuit says. There are currently "hundreds of millions of consumers of financial products and services who are parties to agreements containing arbitration clauses," and changing them would be costly. Just notifying people with credit cards that the terms of their contracts have changed would cost "millions of dollars," according to the lawsuit.
The CFPB is also taking fire from another regulator, the Office of Comptroller of the Currency. The CFPB arbitration rule could cause the interest rates on credit cards to rise significantly — as much as 25%, according to the OCC, which oversees the banking sector. "That's a 25% increase in credit costs for people who may live week to week. There's a real, tangible economic effect that it may have on consumers," Keith Noreika, acting head of the agency, said at a Philadelphia conference this week.