With looming existential threats from both the Trump administration and the federal court system, the Consumer Financial Protection Bureau went ahead on Monday with a controversial rule that will change the way nearly all consumer contracts with financial institutions are written.
The rule will ensure that all consumers can join what CFPB Director Richard Cordray called "group" lawsuits — generally known as class-action lawsuits — when they feel financial institutions have committed small-dollar, high-volume frauds. Currently, many contracts contain mandatory arbitration clauses that explicitly force consumers to waive their rights to join class-action lawsuits. Instead, consumers are forced to enter individual arbitration, a step critics say most don't bother to pursue.
Consumer groups have for years claimed waivers were unjust and even illegal, but in 2011, the U.S. Supreme Court sided with corporate lawyers, paving the way for even more companies to include the prohibition in standard-form contracts for products like credit cards and checking accounts.
Monday's rule is slated to take effect in about eight months, meaning most new contracts signed after that date can't contain the class-action waiver. Prohibitions in current contracts will remain in effect.
Consumers who want to ensure they enjoy their new rights can close current accounts and open new ones after the effective date, the CFPB said.
"By blocking group lawsuits, mandatory arbitration clauses force consumers either to give up or to go it alone — usually over relatively small amounts that may not be worth pursuing on one’s own," Cordray said during the announcement.
"Including these clauses in contracts allows companies to sidestep the judicial system, avoid big refunds, and continue to pursue profitable practices that may violate the law and harm large numbers of consumers. … Our common-sense rule applies to the major markets for consumer financial products and services under the Bureau’s jurisdiction, including those in which providers lend money, store money, and move or exchange money."
The ruling was several years in the making, initiated by the Dodd-Frank financial reforms of 2010, which called on the CFPB to first study the issue and then write a new rule. But it almost didn't happen: With the election of Donald Trump and Republican control of the White House, the CFPB faces major changes, including the expiration of Cordray's term next year.
Also, House Republicans have passed legislation that would drastically change the CFPB's structure. Either of these could lead to the undoing of Monday's rule. When I asked the CFPB at Monday's announcement what the process for such undoing would be, the bureau didn't respond.
"I can't comment on what might happen in the future," said Eric Goldberg, Senior Counsel, Office of Regulations.
Cordray cited the recent Wells Fargo scandal as evidence the arbitration waiver ban was necessary. Before the fake account controversy became widely known, consumers had tried to sue the bank but were turned back by courts citing the contract language.
Under the new rules, consumers would have an easier time finding lawyers willing to sue banks in such situations. No lawyer will take a case involving a single $39 controversy, but plenty will do so if the case potentially involves thousands, or even millions, of clients.
Consumer groups immediately hailed the new rule.
"The CFPB’s rule restores ordinary folks’ day in court for widespread violations of the law," said Lauren Saunders, association director of the National Consumer Law Center. "Forced arbitration is simply a license to steal when a company like Wells Fargo commits fraud through millions of fake accounts and then tells customers: ‘Too bad, you can’t go to court and can’t team up; you have to fight us one by one behind closed doors and before a private arbitrator of our choice instead of a public court with an impartial judge.'”
The CFPB and Monday's rule also face an uncertain future because a federal court last fall ruled that part of the bureau's executive structure was unconstitutional. The CFPB is appealing the ruling, and a decision may come soon. Should the CFPB lose, it will be easier for Trump to fire Cordray immediately, and companies may have legal avenue to challenge CFPB rules.
On the other hand, enacting the rule now may give supporters momentum that will be difficult for the industry to stop — a situation similar to the Labor Department's fiduciary rule requiring financial advisers to act in their clients' best interests. While the Trump administration took steps to stop that rule from taking effect, many companies had already begun to comply, and simply continued with that process.
The U.S. Chamber of Commerce was heavily critical of the new rule.
"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,” the Chamber said in a statement.
"As we review the rule, we will consider every approach to address our concerns, and we encourage Congress to do the same — including exploring the Congressional Review Act. Additionally, we call upon the administration and Congress to establish the necessary checks and balances on the CFPB before it takes more one-sided, overreaching actions.”
But consumer groups called Monday's ruling a victory.
“Forced arbitration deprives victims of not only their day in court, but the right to band together with other targets of corporate lawbreaking. It's a get-out-of-jail-free card for lawbreakers," said Lisa Donner, executive director of Americans for Financial Reform. "The consumer agency's rule will stop Wall Street and predatory lenders from ripping people off with impunity, and make markets fairer and safer for ordinary Americans.”
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