NEW: Controversial rule stops financial firms from blocking lawsuits

Sparking plenty of friction in the financial industry and Congress, a federal agency announced today a new rule that bans companies like banks and credit card issuers from using arbitration clauses to keep consumers from banding together to sue them.

Financial trade groups protest this oversteps the bounds of what the Consumer Financial Protection Bureau is supposed to to do, while some of the industry’s supporters in Congress have branded it a big wet kiss to class-action attorneys.

U.S. Sen. Al Franken, D-Minn., called it a “game-changing move” to restore power to American consumers.

The Consumer Federation of America applauded the move affecting credit card, auto loan, student loan, payday loan, and other financial contracts.  The group said it will help consumers who were unknowingly and illegally overcharged to get refunds.

“The rule will help to combat the culture of companies profiting from charging illegal fees and committing other crimes against their customers,” said Rohit Chopra, Senior Fellow at the Consumer Federation of America. “This is an important step of restoring law and order to the financial marketplace.”

CFPB said its rule bans companies from using mandatory arbitration clauses to “deny groups of people their day in court.”

As the agency explains it, many consumer financial products like credit cards and bank accounts put clauses in their contracts that force consumers to use arbitration outside of court to settle disputes. The result makes it very difficult for consumers to get together to sue a bank or financial company in a class-action suit.

“Arbitration clauses in contracts for products like bank accounts and credit cards make it nearly impossible for people to take companies to court when things go wrong,” said CFPB Director Richard Cordray in a statement. “These clauses allow companies to avoid accountability by blocking group lawsuits and forcing people to go it alone or give up. Our new rule will stop companies from sidestepping the courts and ensure that people who are harmed together can take action together.”

But the rule took immediate fire from a powerful Republican House chairman on Monday.

“This bureaucratic rule will harm American consumers but thrill class action trial attorneys,” said U.S. Rep. Jeb Hensarling, R-Texas, chairman of the House Financial Services committee. “In releasing this rule today, Director Cordray ignored a prior request by the acting Comptroller of the Currency that he work with the OCC to resolve its potential safety and soundness concerns.”

Hensarling continued, “As a matter of principle, policy, and process, this anti-consumer rule should be thoroughly rejected by Congress under the Congressional Review Act. In the last election, the American people voted to drain the D.C. swamp of capricious, unaccountable bureaucrats who wish to control their lives.  Congress must work with President Trump to make good on this mandate by fundamentally reforming the CFPB and dismantling the Administrative State.”

The rule would take effect in 60 days and apply to contracts drawn up 180 days after that.

Industry groups said it was misguided.

“We’re disappointed that the CFPB has chosen to put class action lawyers – rather than consumers – first with today’s final rule, ” said Rob Nichols, American Bankers Association  president and CEO.  “As Congress considers changes to the CFPB’s structure and accountability, we also urge lawmakers to overturn this rulemaking.”

Others including issuers of prepaid credit cards agreed.

The rule “will not only harm the prepaid industry, but will more critically deprive consumers of an efficient, inexpensive, and convenient manner to resolve disputes,” said Brian Tate, president and CEO of the Network Branded Prepaid Card Association.  He said it raises costs for card providers and maintained “arbitration has proven to be a faster and more affordable alternative to class action litigation.”

Reader Comments 0

0 comments