Consumer bureau cracks down on arbitration clauses

The Consumer Financial Protection Bureau (CFPB) on Monday issued a controversial rule to prevent companies from using arbitration clauses to stop litigation over customer complaints.

The long-awaited rule targets credit card companies and banks that use arbitration clauses in customer contracts to block lawsuits over alleged wrongdoing or fraud. Such clauses often force consumers to settle complaints with financial companies through mediated arbitration, instead of filing a class-action lawsuit.

“Arbitration clauses in contracts for products like bank accounts and credit cards make it nearly impossible for people to take companies to court when things go wrong,” said CFPB Director Richard Cordray.

{mosads}”These clauses allow companies to avoid accountability by blocking group lawsuits and forcing people to go it alone or give up. Our new rule will stop companies from sidestepping the courts and ensure that people who are harmed together can take action together.”

Credit card companies and banks have argued that arbitration clauses are fair, simple and cheaper ways to settle customer complaints, and that a CFPB ban would overstep the agency’s authority. House Republicans will likely try to repeal 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,” said House Financial Services Chairman Jeb Hensarling (R-Texas). “Congress must work with President Trump to make good on this mandate by fundamentally reforming the CFPB and dismantling the Administrative State.”

The new CFPB rule forces companies to write arbitration clauses in ways that wouldn’t prevent consumers from joining class-action lawsuits. It also forces financial firms to hand over information about “initial claims and counterclaims, answers to these claims and counterclaims, and awards issued in arbitration.”

The CFPB will also collect “correspondence companies receive from arbitration administrators regarding a company’s non-payment of arbitration fees and its failure to follow the arbitrator’s fairness standards,” it said Monday. The agency said the review will allow the CFPB to judge whether the process is fair, and that redacted information received would be published in July 2019.

The rule will take effect in 60 days and will apply to contracts that begin 180 days after that.

The CFPB’s arbitration rule is the latest major regulatory move by an agency that Republicans have long considered heavy-handed in its approach. They are targeting the agency for major reductions in power and independence.

Business groups are already speaking out against the rule and promising action against it.

Senior officials at the U.S. Chamber of Commerce, the powerhouse firm representing business interests, slammed the CFPB’s arbitration rule as a “brazen” act.

“The CFPB’s brazen finalization of the arbitration rule is a prime example of an agency gone rogue. CFPB’s actions exemplify its complete disregard for the will of Congress, the administration, the American people, and even the courts,” said David Hirschmann, CEO of the Chamber’s Center for Capital Markets Competitiveness, and Lisa Rickard, president of the Chamber’s Institute for Legal Reform.

Hirschmann criticized the CFPB study that laid the basis for the agency’s rule. The agency reported that more than 34 million consumers received $1 billion in payments through lawsuits over the last five years. Arbitrators awarded a total of about $360,000 in relief to 78 consumers in two years of arbitration cases the CFPB studied.

Hirschmann called the agency’s data “highly controversial and flawed.” He said the Chamber of Commerce “will consider every approach to address our concerns, and we encourage Congress to do the same — including exploring the Congressional Review Act,” a law that allows Congress to overturn rules within 60 days of their finalization.

The American Bankers Association said the CFPB rule favors trial lawyers over consumers, and called arbitration “a convenient, efficient and fair method of resolving disputes at a fraction of the cost of expensive litigation, which helps keep costs down for all consumers.”

The lobbying group, which represents major banks, called on Congress to overturn the rule.

The Credit Union National Administration (CUNA), meanwhile, said it was still reviewing the rule and that it was “disappointing” that the CFPB ramped up regulations on credit unions.

“There is no evidence of consumer abuse by credit unions and as financial institutions that are member-owned,” said CUNA President and CEO Jim Nussle, and “credit unions have a long history of working with their members to resolve disputes.”

“The additional regulatory burden imposed on credit unions in response to abuses by other financial services providers further rigs the regulatory scheme in favor Wall Street banks and other abusers of consumers and does credit union members an incredible disservice.”

Cordray said on a Monday conference call that he realized the Republican majority in Congress could repeal the rule, but insisted the CFPB needed to do the right thing for consumers.

Financial-sector watchdogs praised the CFPB’s action. Sen. Elizabeth Warren (D-Mass.), the bureau’s architect, said the arbitration rule “will allow working families to hold big banks accountable when they’re cheated and help discourage the kinds of surprise fees that consumers hate.”

Warren said “the [Chamber] and other big business lobbying groups will go all out to get Republicans in Congress to reverse this rule,” forcing Republicans “to decide whether to defend the interests of their constituents or shield a handful of wealthy donors from accountability.”

The National Association of Consumer Advocates (NACA), which represents more than 1,500 consumer fraud attorneys, also praised the CFPB rule.

“We are pleased with this common sense solution to give consumers back their right to go to court when they are systematically cheated or ripped off by big banks or predatory lenders,” said Christine Hines, the NACA’s legislative director.

“With this change, bad actors in the financial markets will be less inclined to fleece their customers and pad their bottom line with illegal or fraudulent practices.”

Updated at 5:14 p.m.