Published 2:30 pm, Monday, July 10, 2017
The nation’s consumer watchdog is adopting a rule that would pry open the courtroom doors for millions of Americans, restoring their right to bring class-action lawsuits against financial firms.
Under Monday’s Consumer Financial Protection Bureau rule, banks and credit card companies could no longer force customers into arbitration and block them from banding together to file a class-action suit.
The change would deal a serious blow to Wall Street and could wind up costing financial firms billions of dollars.
More immediately, its adoption is almost certain to set off a political firestorm in Washington, where both the administration of President Trump and House Republicans have pushed to rein in the consumer finance agency as part of a broader effort to lighten regulation on the financial industry.
Under the Congressional Review Act — a 1996 law that had been rarely used before the current Congress employed it to reverse 14 rules from the Obama administration — lawmakers have 60 legislative days to overturn the rule blocking mandatory arbitration. The rule could take effect next year.
The Chamber of Commerce and other business groups have belittled the rule as nothing more than a gift to class-action lawyers, who tend to be Democratic donors.
But as much as Republicans deplore the consumer protection agency, they may find it difficult to kill a rule that could have wide populist appeal. Across the country, judges, prosecutors and regulators have decried arbitration clauses for allowing corporations to circumvent the courts and for taking away the only tools citizens have to fight illegal or deceitful business practices.
The rule is one of the signature efforts of the Consumer Financial Protection Bureau, which was created in 2010 as part of the Dodd-Frank regulatory overhaul to safeguard the rights of millions of Americans in the aftermath of the mortgage crisis.
At a time when Dodd-Frank has come under attack, the arbitration initiative from the consumer finance agency — which operates independently from the Trump administration — is a provocative stand against the prevailing political tide in Washington.
Indeed, the rule is largely unchanged from when it was issued in draft form in May 2016 and the agency began soliciting comments from industry.
It is that kind of independence that has drawn particular ire from Republicans.
Last month, the Treasury Department issued a report recommending that the Consumer Financial Protection Bureau be neutered, accusing it of regulatory overreach and calling for the president to be able to remove its director, Richard Cordray.
Supporters of the agency say arbitration is exactly the kind of issue that requires independence from corporate interests.
The rule will unwind a series of brazen legal maneuvers undertaken by major U.S. companies to block customers from going to court to fight potentially harmful business practices.
“These clauses allow companies to avoid accountability by blocking group lawsuits and forcing people to go it alone or give up,” Cordray said in a statement.
Over decades, financial institutions, led by credit card companies, figured out a way to use the fine print of their contracts to force consumers into private arbitration, a secretive process where borrowers have to go up on their own against powerful companies with deep pockets.
Prevented from banding together in a class and pooling their resources, most people simply abandon their claims entirely, never making it to arbitration at all.
The new rules could change all that when it comes to consumer finance. While the protections would not apply to existing accounts, consumers could pay off old loans and get new accounts that would fall under the new rules.
The new rules do not explicitly outlaw arbitration, but industry lawyers say that they will effectively kill the practice.
“If this rule goes into effect, what we are going to see is a huge avalanche of litigation and a loss to consumers of the benefits of arbitration,” said Alan Kaplinsky, a lawyer with Ballard Spahr in Philadelphia, who is widely considered the father of arbitration clauses.
To Kaplinsky, who opposes the rule, arbitration offers a faster and more efficient way to resolve legal disputes.
In the debate about arbitration, those assertions were almost entirely anecdotal. There is no federal database that tracks arbitrations and the process is entirely secretive.
The rule from the bureau would apply only to the financial companies regulated by the agency and would not touch arbitration clauses buried in the fine print of nursing homes or employment contracts.
Clauses embedded in those contracts have pushed disputes about elder abuse, sexual harassment and even wrongful death out of view.
Recognizing that problem, the federal agency that controls more than $1 trillion in Medicare and Medicaid funding proposed a rule in September that would have barred any nursing home that gets federal funding from requiring that residents resolve disputes in arbitration. But the protection was fleeting. Soon after Trump took office, the administration moved to scrap the rule.
In some ways, the fate of the nursing home rule adds urgency to the efforts by the consumer bureau. The agency’s rule represents the first significant blow to arbitration since a pair of Supreme Court decisions in 2011 and 2013 enshrined its use.
Those decisions, which initially drew scant attention outside the cloistered legal world, upended decades of jurisprudence that had been put in place to protect workers and consumers.
Jessica Silver-Greenberg and Michael Corkery are New York Times writers.