Senate approves repeal of CFPB arbitration rule in win for financial institutions

Mike Pence

Many consumers must go through an arbitrator to resolve financial disputes, but the Consumer Financial Protection Bureau finalized a rule that bans most types of mandatory arbitration clauses.

"Senate Republicans voted to give companies like Wells Fargo and Equifax a get-out-of-jail-free card", said Karl Frisch, the executive director of Allied Progress, a consumer watchdog organization based in Washington, D.C. The rule allows consumers to avoid being forced into arbitration if they have a dispute with a company.

Get a more complete view of the reasons numerous rule's detractors are citing and what arguments the bureau's leadership has put forth in its defense. The CFPB did not immediately respond to MarketWatch's question about whether the Senate's vote will impact existing class-action suits against companies.

A Treasury report argued that plaintiffs in class action lawsuits were no better off than they were under forced arbitration.

"On Monday, the Treasury Department released a report opposing the rule, saying it would favor trial lawyers over consumers by prompting frivolous lawsuits", CNN Money's Borak and Barrett write.

The Treasury does not call for the rule to be repealed or otherwise defeated, but the analysis will likely serve as ammunition for congressional Republicans and the business community who are attempting to undo it. Republicans in the U.S. Senate are now trying to garner enough support to pass a resolution that would repeal the rule, after a similar measure passed in the U.S. House. But Sen. John McCain of Arizona, whom some Democrats had hoped to sway, voted to overturn the rule.

Under the rule, banks could still demand arbitration in individual matters but would not be able to block class-action cases - something many institutions now prohibit through contract clauses that require customers to handle all disputes in private arbitration.

Those who opposed the rule, including a group of Republican senators led by Mike Crapo, a senator from Idaho who is the chairman of the U.S. Senate Committee on Banking, Housing and Urban Affairs, said the CFPB is too powerful.

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While hard to project exactly, and relying on some assumptions, "it should be in the same order of magnitude [as the current cost of class-action litigation] - at most a dollar per consumer per year (and likely much less, if any)", he says.

The bureau is headed by Richard Cordray, an Obama administration appointee who has been targeted for removal by some congressional Republicans.

The CFPB, created through legislation in 2010, when Democrats controlled Congress and the White House, worked on the rule for years.

Democrats, on the other hand, say that class-action lawsuits were more effective at holding big businesses accountable and offer a viable path for restitution when it comes to smaller claims.

Mandatory arbitration became relevant during the recent controversy over credit agency Equifax, which experienced a data breach that impacted more than 145 million US adults' personal data.

What is the forced arbitration rule?

Sen. Sherrod Brown, D-Ohio, said the Republicans had betrayed ordinary Americans. Since 2007, creditors have been prohibited by the MLA from including arbitration agreements in contracts for consumer credit extended to active-duty service members and their dependents where the credit is a closed-end payday loan with a term of 91 days or less in which the amount financed does not exceed $2,000, a closed-end vehicle title loan with a term of 181 days or less, or a closed-end tax refund anticipation loan.

Most people who geta share of class-action settlements get a pittance as their reward, Treasury added: on average, $32.35 per person. However, there will "certainly" be more forced arbitration clauses in contracts in the future, and fewer cases brought against companies, she said.

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