By Thomas McGarity, Martha T. McCluskey and Sidney Shapiro, Center for Progressive Reform
Earlier this week, the Consumer Financial Protection Bureau (CFPB) took decisive action to protect hardworking people who are cheated by banks or other financial institutions. Specifically, the federal agency issued a rule limiting what are known as “forced arbitration” agreements in the contracts we must all sign when we open a bank account or purchase certain kinds of financial products and services. Last year, scholars and staff at the Center for Progressive Reform authored a report that supported CFPB’s efforts and asked the agency to adopt an even stronger set of protections for consumers. Although the agency did not adopt the stronger provisions, the final rule nevertheless offers crucial protections for American consumers. We are therefore concerned about the rule’s ultimate fate in the courts and in Congress.
Unbeknownst to most Americans, nearly all financial contracts include a clause that requires them to enter into arbitration if they believe they have been cheated by their bank or financial institution and want to do something about it. These contracts also prevent a consumer from joining a class action with thousands of others who have been cheated in the same way at the same time. In general, arbitration is a bad deal compared to the courts. As our report explained, the arbitration process is full of barriers that discourage people from bringing claims, is heavily rigged to favor corporate parties, and, in the very unlikely event that the consumer does manage to prevail, provides inadequate compensation to victims of corporate wrongdoing.
Class action lawsuits are particularly important for consumers of financial services and products because the dollars at stake in each individual case are often not large enough to justify solitary lawsuits. Individual lawsuits are helpful when a bank or credit card company cheats a few people out of tens of thousands of dollars each. They are useless when those same companies cheat tens of thousands of people out of a few dollars each. In both cases, the corporation is able to unjustly enrich itself to the tune of perhaps millions of dollars. With forced arbitration clauses that prohibit class action lawsuits, though, the financial industry has created a “Get Out of Jail Free” card that insulates them against any meaningful accountability in the latter type of case.
The CFPB’s final rule preserves individuals’ rights to enforce financial contracts through class actions lawsuits, although it still permits the financial industry to force consumers bringing individual claims to use the arbitration process, a practice that should have also been prohibited. Short of that, the CFPB’s authority under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) gives the agency ample authority to at least prohibit the most anti-consumer features of the arbitration process in individual claims, such as requirements that arbitration proceedings take place in inconvenient locations or imposition of unduly short statutes of limitations for initiating claims.
Despite its arbitration provisions, the CFPB’s final rule is a victory for the public interest. Since the arrival of the Trump administration, hard-won progress in safeguarding Americans’ savings and health has ground to a halt or is even being reversed. Conservatives can hardly contain their glee regarding the “historic” slowdown of the regulatory process used to implement and enforce bedrock laws like the Clean Air Act and the Federal Food, Drug, and Cosmetic Act.
As this rule illustrates, the CFPB remains one of the last bastions of progress in federal government safeguards aimed at ensuring justice for ordinary working people who can’t individually hire an army of lobbyists and lawyers to protect their families against abusive business practices. This progress owes much to the CFPB’s sound design as an independent regulatory agency, which helps to insulate it against undue interference from the Trump administration.
Unfortunately, the future of the CFPB’s forced arbitration rule is far from certain. The U.S. Chamber of Commerce, a powerhouse of some of the wealthiest multinational corporations, along with the well-resourced financial services industry, are already lawyering up to begin a legal assault against the rule. (Irony alert: There are apparently times when they see the value in resolving disputes in the courts.) And members of Congress are already threatening to repeal the rule through the expedited procedures afforded by the Congressional Review Act (CRA). For this process to work, opponents of the rule would need to cobble together simple majorities in the House and Senate. The final step would be Trump’s signature, which, given his strong anti-safeguard rhetoric and close connections to Wall Street, seems all but assured if a CRA resolution makes it out of Congress.
Even the future of the CFPB as a positive force for the public interest seems uncertain. Its independent structure is the subject of ongoing litigation, and several bills pending in Congress – such as the Regulatory Accountability Act and the Independent Agencies Regulatory Analysis Act – are explicitly designed to subject the CFPB and other independent agencies to greater interference from the White House. If these kinds of bills were to become law, the CFPB would be unlikely to fulfill its statutory mission to protect the financial security of working families in a timely and effective manner.
In short, this week’s victory is important. But for supporters of sensible protections aimed at promoting greater financial security, the fight is far from over.