It's almost unheard of for the federal government to ban anything done by Wall Street bankers. Maybe the feds ask for banks to provide more disclosure or somehow limit a particularly onerous practice. But a ban, especially in this new era of industry friendliness ushered in by Donald Trump? Yeah, right.
That's what makes the Monday announcement by the Consumer Financial Protection Bureau (CFPB), the watchdog agency conceived by Elizabeth Warren, so unique. A new rule promises to straight-up ban (in almost all cases) a harmful activity affecting consumers across America. It also sets up the ultimate put-up or shut-up moment for the Republican Congress: They can continue to whine about the agency and its pesky crackdowns on Wall Street, or they can block it, defying the interests of millions of their own constituents in the process.
The rule, set to take effect in March, would prevent banks from using arbitration clauses to deny consumers the right to file class-action lawsuits. Right now, when you sign up for a bank or credit card account, chances are you're foreclosing a key avenue to relief in the event of wrongdoing. Buried in the fine print, the contract probably says that if you have a beef, instead of suing the bank, you have to submit to an extra-judicial hearing, where the arbitrator is often dependent on the corporation in question for providing them with continued business. "It pushes disputes into a secretive process where the arbitrator has an incentive to rule for the party paying it," said Lauren Saunders, associate director at the National Consumer Law Center, a consumer justice organization.
Banks have a habit of using forced arbitration to prevent people from banding together as a group in class-action lawsuits, and courts have let them do so. For example, Wells Fargo used arbitration to block consumer lawsuits over its creation of fake bank accounts.
This makes fighting a bank over a $100 or $200 rip-off hardly worth pursuing: After hiring a lawyer and enduring the arbitration process, you could end up losing money even if you won the case. Class actions are different because they allow consumers without massive (or even any) resources to obtain justice for widespread harm in ways that just cannot happen otherwise. And if consumers have no recourse, it gives banks a green light to steal from them with impunity. "If you can harm millions by $100 each, and only have to pay the few people who pursue the claim, it makes it easy to continue to break the law," explained Saunders.
CFPB's rule would make it just about impossible for banks to use arbitration to stop class-action lawsuits. Firms could still use arbitration clauses in contracts for new customers, but they would have to specify (with language supplied by the feds) that class actions are permitted. "A cherished tenet of our justice system is that no one, no matter how big or how powerful, should escape accountability if they break the law," as the agency's embattled director, Richard Cordray, put it Monday when announcing the rule.
The 2010 Dodd-Frank financial reform law creating the Consumer Financial Protection Bureau specifically authorized it to study arbitration. The agency found that class actions were far more successful than arbitration in giving consumers a real shot at deterring shady behavior. So CFPB went ahead and moved to ban the class-action restriction with this rule, while adding transparency to arbitration claims and awards so the public can recognize the fairness of the process (or lack thereof).
Now Congress has a choice to make: Lawmakers can use the Congressional Review Act at any time in the next 60 legislative days (meaning days they are in session) to formally disapprove. That would block the regulation, killing the new consumer protection. The GOP majority has already used the Congressional Review Act 14 times since January to nullify rules passed under Barack Obama, and US senator Tom Cotton, an Arkansas Republican, has already vowed to introduce a resolution to block the arbitration rule. After all, his party has loudly complained about the unchecked power of Warren's brainchild agency; this is their chance to check it.
But do they really want to take that step? Arbitration clauses tend to be broadly unpopular; by blocking the rule, Republicans would be affirmatively denying millions of consumers the ability to protect themselves legally. "Are members of Congress going to look three million Wells Fargo account holders in the face and say you don't get your day in court?" Saunders wondered. For his part, Cordray said when announcing the final rule that he wasn't concerned about whether Congress would block it, only whether he was acting "for the protection of consumers and in the public interest."
Republicans already punted on one opportunity to block the consumer protection agency: They could have reversed a regulation for prepaid cards finalized last October. The rule imposes limitations on customer losses when cards are stolen or lost, and requires customers receive info about account terms and fees. Congress chose to avoid potentially raising the ire of millions of prepaid card users, and declined to act.
Will Republicans take the plunge on this one? Maintaining the status quo on forced arbitration certainly matters to banks and lobbyists. But there's no other constituency calling for it. With talk of a potential Democratic wave in the midterm elections, and few significant legislative accomplishments, do Republicans in Congress really want to spend its precious time helping Wall Street rip off customers? They're already pushing a disastrously unpopular healthcare bill; do they want to compound that by giving banks a get out of jail free card?
This raises the larger question of the future of the financial regulation in America. Republicans from Trump on down are rhetorically committed to crippling consumer protections and the agency that produces them. But when push comes to shove, they've done little so far to hinder the bureau's mission. "It's been business as usual in CFPB," is how Saunders put it.
Republicans have so far seemed more interested in carping about an unaccountable agency constraining lending and crushing small banks (it's not, by the way) than actually undertaking a frontal assault on consumer protection. The fate of this seemingly obscure arbitration rule offers a fresh test of just how destructive they wish to be.
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