Like many battles in Washington these days, the Senate vote against the CFPB rule pits consumer groups against financial institutions and their representatives
Hours before the House Financial Services committee was scheduled to hold a hearing on the Equifax data breach, the Senate voted Tuesday night to repeal a federal rule that would have made it easier for consumers to seek redress through class action suits.
Under the rule, from the Consumer Financial Protection Bureau, consumers would not have to submit to mandatory arbitration in disputes with financial companies subject to CFPB oversight rules such as credit card companies; they would have the option of joining with other consumers in a class action suit. Now banks will maintain their right to require customers to sign away their right to sue, assuming President Donald Trump signs the joint resolution. (The House had passed the bill in July.)
The Senate vote “robs consumers of their most effective legal tool against corporate wrongdoing,” said CFPB Director Richard Cordray in a statement. “As a result, companies like Wells Fargo and Equifax remain free to break the law without fear of legal blowback from their customers. I urge President Trump to stand with consumers and veto this resolution.”
So do other consumer groups, such as the Consumer Federation of America and U.S. PIRG, and Democratic legislators like Sen. Elizabeth Warren, D-Mass., and Rep. Maxine Waters, D-Calif., the ranking member of the House Financial Services Committee who said in a statement that the Senate vote Tuesday night was another act by Republicans to “weaken and ultimately destroy” the CFPB.
There’s little chance that Trump won’t sign the bill, especially since Vice President Mike Pence cast the deciding vote to void the rule.
The White House released a statement Wednesday morning applauding the Senate vote. Referring to a recent report by the Treasury Department, Trump said “the CFPB's rule would neither protect consumers nor serve the public interest…. Consumers would have fewer options for quickly and efficiently resolving disputes.”
Trump, Senate Banking Committee Chairman Mike Crapo, R-Idaho, and others opposing the rule said its primary beneficiaries would be plaintiffs’ attorneys who bring class action suits, a sentiment echoed by Richard Hunt, president and chief executive of the Consumer Bankers Association trade group.
“Overturning the CFPB’s arbitration rule ensures consumers retain the tools they need to receive relief without going through long, drawn-out, costly court proceedings — where no one benefits except trial lawyers,” said Hunt in a statement.
Julie Reiser, a partner at Cohen Milstein Sellers & Toll, is one of those trial lawyers, and she disputes that criticism of the CFPB rule. “Class action suits serve a very useful purpose," she said. "They enable deceptive conduct and misconduct of companies to become public and help create reforms in those corporations.”
She referred to the Wells Fargo scandal involving the creation of phony bank accounts. “If each of those individuals had gone to private arbitration, there would not have been evidence that exposed the accounts.”
As it happened, Los Angeles City Attorney Mike Feuer sued Wells Fargo for opening bank and credit accounts without customers’ authorization, which spurred the investigation by the CFPB that uncovered the creation of more than 2 million bank deposit and credit card accounts — a number that has grown to 3.5 million — the resignation of its CEO, a big drop in profits and a class action shareholder lawsuit.
“If misconduct is systematic, with a root cause that doesn’t come to light because individuals sue through arbitration, corporations are never held accountable to change,” said Reiser.
Murray Silverstein, partner at the Greenspoon Marder law firm, which represents financial companies that would have been subject to the CFPB anti-arb rule, said that class action suits should not be used as a vehicle to reform and regulate because that’s the role of Congress and federal agencies.
Such suits would cost financial firms “substantial amounts” to litigate, which could increase the cost of credit for consumers while failing to deliver them substantial compensation, said Silverstein. Arbitration is the “most efficient, cost-effective way” for consumers to resolve financial disputes, said Silverstein, noting that costs are minimal and decisions are binding.
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