Congress Imposes High Barriers for Consumers to Sue Big Financial Institutions

By Irma Cruz*

By repealing a rule enacted to help consumers sue large financial institutions, the GOP has unveiled their power to keep the Consumer Financial Protection Bureau (“CFPB”) from drifting away from Trump’s agenda. CFPB is one of the few agencies that has continued to be led by an Obama-era appointee and, consequently, this has provoked a lot of frustration for both big businesses and the republican party.[1] This repeal was the perfect opportunity for the GOP to show Richard Cordray who is really calling the shots in the agency.

On Tuesday, October 24, Mike Pence broke the Senate’s tie and voted to repeal a rule that would have made it easier for consumers to join forces and sue large financial institutions.[2] The rule was enacted by CFPB, an independent agency created by the Dodd-Frank Act as a response to the financial crisis of 2008.[3] The Agency was created to “provide a single point of accountability for enforcing federal consumer financial laws and protecting consumers in the financial marketplace.”[4]

Two Supreme Court cases in 2011 and 2013 were the catalysts of a widespread use of arbitration clauses.[5] The popularity of these arbitration clauses gave rise to consumer concern that these contractual provisions were employed by big banks to avoid liability. Due to their popularity and this new found worry, the CFPB was required to study the effects of these arbitration clauses.[6] The study revealed that consumers who were not allowed to sue in court typically did not take the available route of arbitration.[7] Furthermore, the agency also found that in “the two-year period studied, only 78 arbitration claims resulted in judgment in favor of consumers” with a total of only $400,000 in relief.[8] On the other hand, over a five-year span, 34 million consumers received a total of about $1 billion from lawsuits brought to the courtroom.[9]

Due to the abovementioned findings, CFPB enacted a new rule in July.[10] The rule was not meant to ban all hidden arbitration clauses found in the fine print of financial contracts but instead, would ban “provisions that block consumers from banding together to bring class-action cases.”[11]

However, the House resorted to the Congressional Review Act (“CRA”) and voted to repeal the measure within a month of it being issued.[12] The “Congressional Review Act… enables lawmakers to undue regulations by majority vote within 60 working days from when they are announced.”[13] Although, prior to this year, the CRA had only been employed once, the “GOP lawmakers have used procedures under the Congressional Review Act fourteen times this year to kill rules promulgated during the final days of Barack Obama’s presidency.”[14] The House voted in July to repeal the rule, and this past Tuesday, with Pence’s vote, the Senate reached a majority and voted for the same result.[15] On November 1, President Trump signed the bill that officially repealed the rule.[16] This outcome marks a “significant victory for Republicans in their longstanding campaign to rein in the consumer bureau.”[17] Although, under Trump, many agencies have respected our president’s wishes and “roll[ed] back or at least slow[ed] regulations,” CFPB has continued to aggressively regulate financial institutions.[18]

The Republican party defends their decision to repeal this CFPB rule by listing several pro-consumer justifications. One such justification is that this new rule would trigger several frivolous class-action suits, and the cost of fighting these lengthy lawsuits would fall on the consumer.[19] Furthermore, Republicans allege that arbitration clauses represent a faster and more efficient way of solving disputes, and that CFPB is diminishing consumer’s options.[20] The last pro-consumer justification from Republicans is that arbitration has always worked well for consumers and has resulted in more money from those judgments.[21]

These three pro-competitive justifications are not supported by empirical evidence, and, on the contrary, CFPB’s study directly refutes such assertions. The study revealed that arbitration results in less money for consumers, and that consumers do not tend to turn to arbitration when they cannot sue.[22] Furthermore, this rule did not aim to eliminate options for consumers, as it does not ban all arbitration clauses but instead, gave them the option to sue as a class instead of restricting them to individual arbitration.

On the other hand, those who supported the rule correctly alleged that “class actions are often the only practical way consumers can pursue complaints against companies because individuals may not have the resources to take the company to court.”[23] In class actions, several individuals can aggregate their amounts to incentivize lawyers to take the case on contingency.[24] Additionally, those who supported this CFPB rule from the beginning believed that it gave average people more power to fight these big financial institutions, and that class-actions held these big banks accountable.[25] This rule would have kept the big financial institutions accountable by multiplying the options available to consumer who seek relief and minimizing the risk inherent in trusting these big businesses.

Furthermore, Democrats and consumer advocates argued that sometimes class-actions are not about the size of the payout but about changing the bad actors’ practices.[26] When cases go to arbitration, the wrong is not exposed, but a day in court helps publicize the injustice. Moreover, supporters argued that arbitrations favor big companies, and that consumers are being kept out of the courtroom on purpose.[27] To support the necessity of this rule, those advocating for this measure relied on the Wells Fargo scandal. For years, Wells Fargo used arbitration clauses to block class-action lawsuits from consumers complaining of unauthorized accounts being opened under their names.[28]

The Republican party might genuinely believe that this repeal was in the name of consumer welfare, but their reasoning does not amount to more than conjecture. Conversely, the Democratic party and CFPB have evidence to support a need for a rule of this type. Class-actions in a court room allow these lawsuits to be visible and allow consumers to join forces in reaching the end they desire (whether a monetary judgment or a changed behavior). However, it is clear to Republicans that this repeal symbolized more than their ability to support arbitration clauses. It represents a warning to “the agency and its Obama holdover director that the GOP Congress will act as policeman should the bureau stray too far from the Trump agenda.”[29]

* Irma Cruz is an Associate Editor on MJEAL. She can be reached at irmacruz@umich.edu.


The views and opinions expressed in this blog are those of the authors only and do not reflect the official policy or position of the Michigan Journal of Environmental and Administrative Law or the University of Michigan.

[1] Jessica Silver-Greenberg, Consumer Bureau Loses Fight to Allow More Class-Actions Suits (Oct. 24, 2017), https://www.nytimes.com/2017/10/24/business/senate-vote-wall-street-regulation.html.

[2] Id.

[3] Elizabeth Dexheimer, The Senate Voted to Make It Harder to Sue Banks (Oct. 24, 2017, 10:48 PM), https://www.bloomberg.com/news/articles/2017-10-25/consumer-bureau-s-arbitration-rule-overturned-by-vote-in-senate.

[4] Id.

[5] Silver-Greenberg, supra note 1.

[6] Id.

[7] Id.

[8] Id.

[9] Roger Yu, CFPB: Financial Firms Can No Longer Force Consumer to Use Arbitration in Group Disputes (Jul. 11, 2017, 07:01 AM), https://www.usatoday.com/story/money/2017/07/10/cfpb-banks-credit-card-firms-can-no-longer-force-consumers-use-arbitration/465495001/.

[10] Erik Sherman, Republicans Overturn Arbiration Rules that Would have Protected Consumers (Oct. 25, 2017, 12:13 AM), https://www.forbes.com/sites/eriksherman/2017/10/25/republicans-overturn-arbitration-rules-that-would-have-protected-consumers/#57f3a8c678f5.

[11] Id.

[12] Id.

[13] Dexheimer, supra note 3.

[14] Ted Barrett and Donna Borak, Senate Kills Rule that Made It Easier to Sue Banks (Oct. 25, 2017, 11:41 AM), http://www.cnn.com/2017/10/24/politics/senate-cfpb-arbitration-repeal/index.html.

[15] Jim Puzzanghera, Senate Vote to Kill New Rule Allowing Class-Action Lawsuits Against Banks; Pence Casts Deciding Vote (Oct. 25, 2017, 03:20 AM), http://www.latimes.com/business/la-fi-arbitration-rule-senate-20171024-story.html.

[16] Julia Horwitz, Trump Kill Rule that Made it Easier for People to Sue Banks (Nov. 1, 2017, 06:20 PM),  http://money.cnn.com/2017/11/01/news/trump-repeals-cfpb-arbitration-rule/index.html

[17] Dexheimer, supra note 3.

[18] Silver-Greenberg, supra note 1.

[19] Id.

[20] Silver-Greenberg, supra note 1; Puzzanghera, supra note 15.

[21] Kevin McCoy, Senate Overturns New Rule Allowing Class-Action Suits Against Banks (Oct. 25, 2017, 07:59 AM), https://www.usatoday.com/story/money/2017/10/25/senate-votes-overturn-rule-consumers-suing-banks/797728001/

[22] Silver-Greenberg, supra note 1.

[23] Sherman, supra note 10.

[24] Id.

[25] Puzzanghera, supra note 15; Stephen Dinan, Congress Overturns Anti-Arbitration Rule as GOP Flexes Legislative Muscle (Oct. 24, 2017), https://www.washingtontimes.com/news/2017/oct/24/senate-overturns-anti-arbitration-rule-consumer-fi/.

[26] Silver-Greenberg, supra note 1; Puzzanghera, supra note 15.

[27] Dinan, supra note 25; Dexheimer, supra note 3.

[28] Puzzanghera, supra note 15.

[29] Dinan, supra note 25.

Leave a Reply

Your email address will not be published. Required fields are marked *