Don’t Strip Consumers Of Their Right To A Day In Court, Say Advocates, Senators

Image courtesy of (SarahMcGowen)

Last week, bank-backed lawmakers revealed their plans to pass fast-track legislation that would undo the Consumer Financial Protection Bureau’s recently finalized rules that prevent banks and other financial institutions from stripping customers of their constitutional right to a day in court. Now, consumer advocates are urging the rejection of the legislation, expected to be voted on this week. 

Consumer groups, including our colleagues at Consumers Union, today spoke out against legislation that would rescind the CFPB’s arbitration rule before it even goes into effect.

Arbitration clauses — often found deep in the fine print of contracts — allow companies to force customers with legal disputes out of the courtroom and into the process of private, often confidential, binding arbitration.

“The CFPB’s new rule restores the rights of consumers who have been treated unfairly to join with others and seek the relief they deserve in court,” George Slover, senior policy counsel for Consumers Union, said in a statement. “Repealing the arbitration rule would keep this traditional legal pathway blocked, protecting banks and lenders at the expense of consumers.”

The Rules

The CFPB 775-page rule [PDF] applies to the use of “forced arbitration” clauses in consumer contracts. These little bits of legalese, often buried very deep in fine-print agreements that the customer has no authority to change, generally do two things: First, they prevent the customer from filing a lawsuit against the company. Instead, all disputes must be settled through a private — frequently confidential — arbitration process outside of the legal system.

Second, many arbitration clauses include a ban on class action claims, even through arbitration. So even if there are thousands — or in cases like the Wells Fargo’s fake account fiasco, potentially millions — of customers who have all been wronged in a similar way, they are barred from joining their complaint into one case.

Instead, each of those customers must go through arbitration on his or her own, and since arbitration results set no legal precedent, it’s possible that some customers could have different arbitration outcomes despite having the exact same claim.

The CFPB rule does not outlaw the use of arbitration clauses. Rather, it prevents affected financial operations from using these clauses to prevent class actions. Thus, individual cases could still be resolved through arbitration, but banks under CFPB’s oversight would not be able to block multiple wronged customers from combining their cases.

The rule includes specific language that companies must use if they include an arbitration clause in a new contract.

The rule, which will take effect 60 days after it is published in the Federal Register and become enforceable after 241 days, does not apply to all consumer contracts. For instance, the CFPB notes that existing accounts are not subject to the arbitration ban.

The Legislation

Almost immediately after the CFPB unveiled its finalized rules, lawmakers revealed their intention to repeal the regulations via the Congressional Review Act — a law that allows lawmakers to voice their disapproval of new federal regulations.

Under the CRA, lawmakers in each chamber of Congress vote on resolutions of disapproval. If a simple majority in each chamber approves the resolution, it goes to the White House.

And as expected, last week, several heavily bank-backed lawmakers introduced the joint resolutions, marking the first steps in unraveling the CFPB’s rule.

On the house side, Rep. Keith Rothfus (PA) introduced HJ Res 111, while Sen. Mike Crapo (ID) introduced SJ Res 47.

Both measures provide “congressional disapproval under chapter 8 of title 5, United States Code, of the rule submitted by Bureau of Consumer Financial Protection relating to ‘Arbitration Agreements.’”

Don’t Do It

“Forced arbitration is stacked against consumers and shields financial companies from being held accountable for breaking the law and mistreating their customers,” Slover, of Consumers Union, said in a statement.

The new rules, which were first revealed in draft form in May 2015, are intended to take away these companies’ “get out of jail free card.”

In a letter [PDF] sent to House members today, Consumers Union notes that the rule is a measured and carefully crafted response to the increasingly prevalent use of forced arbitration.

CU points out that while the rule aims to protect consumers from forced arbitration, it doesn’t restrict lenders and consumers from agreeing to arbitration if they desire.

“Giving the consumer a genuine choice also means the lender has the incentive to make sure the alternative is fair and workable, so informed consumers will have a reason to choose it,” Slover wrote.

For these reasons, CU urges members of Congress to support the CFPB’s rule and allow it to take effect.

Advocates from the National Consumer Law Center, Center for Responsible Lending, and the coalition group Fair Arbitration Now also urged Congress to uphold the law.

“A CRA resolution to repeal the rule would send a clear message to your constituents that Congress is willing to easily dismiss their constitutional rights for the protection of Wall Street banks that break the law,” Fair Arbitration Now, a network made up of more than 70 consumer, labor, legal, and community organizations, wrote in a letter to Reps.

Advocates with NCLC notes in a statement that the lawmakers pushing for the repeal of the rules are “doing the bidding of Wall Street by jumping to take away our day in court and repeal a common-sense rule years in the making.”

“The ink is barely dry on the CFPB rule that will restore consumer rights and Congress is already carrying water for Wall Street lobbyists to block it,” Lauren Saunders, associate director of the National Consumer Law Center, said.

Lawmakers Push Back

Sen. Jack Reed (RI) said today that binding arbitration clauses cut against the fundamental notion that American desert their day in court.

“These clauses are meant to shield corporations, not to protect consumers,” he said during a news conference discussing the legislative efforts to rescind the rules.

Reed’s sentiments were echoed by Sen. Catherine Cortez Mastro (NV), who noted during the call that she encountered several issues with forced arbitration and financial insinuations while serving as Attorney General in Nevada.

“Most of the consumers who need to be protected are people that don’t even know they are being defrauded,” Cortez Mastro said. “People and consumers generally need a choice, either going to court or these arbitration clauses. It is a fundamental right for every American to access America’s court system. Companies shouldn’t be able to trick people to give up those rights in the fine print of these confusing contracts.”

Cortez Mastro added that the CFPB was explicitly directed to craft the rules. “They have done it and now big banks don’t like it and are trying to take that authority away,” she said.