cfpb arbitration rule

A new rule has just been announced by the Consumer Financial Protection Bureau that prevents big banks and payday lenders from tricking customers into falling victim to shady business practices, then forbidding them from going to court in a class-action lawsuit.

While this long-awaited rule prohibiting arbitration clauses with class action bans in consumer financial services contracts is finally on the scene, it’s already being fought at every turn. The Chamber of Commerce, et al, instantly flew into action following the announcement, using every resource at their disposal to stop this rule from going into effect. Additionally, Congressman Jeb Hensarling of Texas – Chair of the House Financial Services Committee – has already called for a Congressional Review Act vote in an attempt to block the rule. If he is successful in this endeavor, no similar regulation would take effect in the future.

So what type of fight lies ahead in the wake of the CFPB’s rule and the resistance that is already rising up? Keep reading to find out what kinds of ramifications we can expect.

The Intent of the Rule

Before we can look ahead, we really should take a moment to look back. This rule was first proposed in May 2016 as a way to control the bad behavior of big banks and lenders with questionable practices.

Both of these types of entities have been using forced arbitration clauses for decades. By burying these clauses in the middle of a fine-print, multi-page agreement with a consumer, they could successfully prevent those consumers from joining forces to sue them in court. In other words, these banks and lenders were legally allowed to illegally trick their customers without the threat of a resulting lawsuit.

The reason banks and lenders push for arbitration is that the payout is so much lower than it would be in a trial — which, of course, works in favor of the financial institution and hurts the consumer. In the aftermath of a study that showed how harmful these arbitration clauses actually were to consumers, and the way it enabled these predatory financial institutions to break the law without consequences, the CFPB took action by issuing this rule that bans forced arbitration clauses in financial service contracts with class action bans.

Reactions to the CFPB Arbitration Rule

Bloomberg reports that during the public comment period, the bureau received almost 13,000 comments on the rule when it was proposed. Some of the commenters speculated that the rule would be abandoned due to pressure from politicians who were sympathetic to the industry.

But on July 10, the CFPB took a clear stance on their rule as something they believe to be necessary. Even though politics may look different than they did when the study was done, the evidence from that study hasn’t changed – which means there’s no reason the bureau should change its position.

The Wells Fargo Example

Back when Wells Fargo was caught setting up fake accounts that customers never wanted, the bank’s attorneys held up the arbitration clause in order to keep customers from taking their case to court. More than 2 million people were affected by Wells Fargo’s underhanded practices, yet Wells Fargo went on the record with United States senators saying that it “believes that the use of arbitration is a fair and efficient process that serves the needs of both parties.”

CNN, however, had a different perspective. In its coverage of the Wells Fargo situation, the news outlet said that forced arbitration clauses “help hide misbehavior by companies in private mediation rather than opening it up to scrutiny in public court documents.”

The practices could have been stopped in 2014 and again in 2015, when consumers filed class action lawsuits against Wells Fargo – but in both cases, the bank used that forced arbitration clause to protect their unsavory business practices and stay out of court.

The CFPB’s rule changes the way that banks have been able to hide their deceptive methods and avoid lawsuits – and it also holds payday lenders accountable for the same thing. But even though this rule sounds like something lawmakers would be eager to support, the truth is that they aren’t.

While we’re not entirely sure what the results will be of the Congressional Review Act that’s been called for, it’s also not clear that legislators will side with the banks and lenders, given how unpopular it would make them with voters. This, then, is the fight we anticipate: will the lawmakers who hung then-Wells Fargo CEO John Stumpf out to dry while loudly condemning his actions remain consistent in their claims and push the rule through in spite of the CRA, or will they side with Wall Street?

Here’s hoping for dignity and honor across the board.