Sometime in the next few weeks, the Consumer Financial Protection Bureau is expected to impose stringent limits on the ability of banks and credit card companies to avoid consumer lawsuits.
The financial services industry has been screaming bloody murder about the CFPB's plan. You can expect the Republican majorities in Congress, and President Trump, to see things their way and block the proposed rule. You can also expect consumer advocates not to roll over quietly.
"We're all preparing for a big fight," says Amanda Werner, who has been keeping an eye on the CFPB rule making for the consumer groups Public Citizen and Americans for Financial Reform.
The issue revolves around a CFPB rule proposed last May aimed at limiting mandatory arbitration clauses in financial services account agreements.
We've reported on the consequences of forced arbitration for the Wells Fargo fake-account scandal. Unlike lawsuits, arbitrations largely unfold in secret. Because the bank was able to force aggrieved customers to take their cases to arbitration rather than court, it not only had a procedural advantage over those customers but kept its misdeeds out of the news. That may have forestalled for years the discovery that employees had been opening bogus accounts in customers' names to meet their sales quotas.
The CFPB rule doesn't outlaw all forced arbitration clauses, only those that also bar class-action lawsuits and class-action arbitrations. These are common provisions in the arbitration clauses imposed on customers by big banks, including Wells Fargo.
And the distinction is important. According to a landmark study of consumer arbitration the CFPB issued in March 2015, its investigators couldn't be sure that customers did any better or worse in arbitrations against their banks and credit card issues than they did in court — when they arbitrated or sued as individuals.
There are a couple of reasons for this. One is that the arbitration record typically doesn't reveal who won the case or how much a customer may have won. The other is that arbitration, like litigation, is so burdensome that individuals seldom bother with it; the CFPB found only about 400 individual arbitrations per year from 2010 through 2012 filed by consumers against banks, credit card companies or lenders.
But the consuming public did much better when it acted as a class. Over the same three-year period, the bureau examined 419 class-action lawsuits that resulted in settlements covering 160 million customers. The total settlements amounted to about $2.7 billion, mostly in cash.
Obviously that doesn't amount to much per claimant — only $16 to $32 each on average, the bureau estimates. But what's more important is that the settlements were a bigger hit to the banking defendants and often includes agreements to change their behavior so the abuses that were the targets of the lawsuits wouldn't happen again.
Those behavior changes, the bureau says could be at least as important for consumers as monetary payoffs, or more so, because they can reach more customers and often are permanent.
So it's no wonder that the banking industry has moved heaven and earth to head off the rule, while consumer groups have moved to advance it. In all, a staggering 120,000 comments were received by the CFPB before the comment period on the proposed rule was closed last August. That in itself has delayed issuance of the rule.
And that hasn't been the end of the jawboning. On Nov. 1, as C. Ryan Barber of the National Law Journal recently reported, representatives of credit card issuers Barclays Bank, Discover and American Express met with CFPB staffers to "supplement" their earlier formal comments. Their goal was to get the bureau to allow financial institutions to continue to block class actions targeting abuses that were already under scrutiny by regulators.
According to a memo of the meeting, the CFPB was suspicious that a company facing a costly class action might report itself to regulators as a ploy to block the lawsuits. Whether the companies succeeded in carving out this exception won't be known until the CFPB issues its rule.
In the meantime, however, the banking industry's friends on Capitol Hill already are waging war against consumer class actions. In partisan terms, at least, they have the upper hand. "It's a fairly unfortunate time for consumer civil justice rights," says Werner.
The attack on class-action rights is following three tracks. One is direct: a bill passed by the Republican-controlled House in March (with no Democratic votes) that places so many roadblocks in the way of class-action lawsuits that they're effectively banned. According to an analysis by the American Civil Liberties Union and other civil justice groups, the measure — cynically entitled the "Fairness in Class Action Litigation Act" — would hobble consumer lawsuits, anti-discrimination cases and civil rights protections by adding years of delay and imposing "a new and impossible hurdle for class certification" in court.
The second track is a measure aimed at overturning much of the Dodd-Frank act, the post-recession law that imposed new regulations on the financial services industry and created the CFPB. Here the main instrument is the "Financial Choice Act," introduced by House Financial Services Committee Chairman Jeb Hensarling (R-Texas). The bill would revoke the authority of the CFPB and the Securities and Exchange Commission to ban forced arbitration in the industries under the jurisdiction. Since it would be subject to a Democratic filibuster in the Senate, the measure's fate is doubtful.
Then there's the Congressional Review Act, which gives the House and Senate the authority to overturn an agency regulation by resolution within 60 days of its enactment. Supporters of the CFPB ban on arbitration fully expect that rule to become a target of the act. It's especially dangerous because a regulation overturned this way can never be restored except with new statutory authorization. President Trump has signaled that he'd be amenable to accepting the Congressional nullification. After all, just two weeks after taking office, he signed an executive order aimed at rolling back of a raft of financial services regulations.
That places the CFPB and its director, Richard Cordray, in a ticklish situation. Cordray appears determined to issue the rule before his term ends in mid-2018. But he must know he'll be poking a stick in the tiger's cage, provoking the Republicans to nullify the rule, perhaps permanently. When his bureau actually will act and what the rule will look like isn't known for sure. What is known, however, is that allowing banks and lenders to block their customers' path to the courthouse is the definition of being consumer-unfriendly.