GOP Kills Regulation That Protects Right to Sue — Now What?

Congress just voted to repeal a rule protecting your ability to join class-action lawsuits against financial companies. Here's what this news means for consumers.

GOP Kills Regulation That Protects Right to Sue — Now What? Photo by Africa Studio / Shutterstock.com

The U.S. Senate voted late Tuesday night to repeal a federal regulation that protects every consumer’s right to join class-action lawsuits against financial service providers like banks and credit card companies.

Senators themselves voted 50-50 on the repeal legislation, and Vice President Mike Pence cast the tie-breaking vote in favor of the legislation.

Republicans have a 52-seat majority in the Senate, but Sens. John Kennedy (R-La.) and Lindsey Graham (R-S.C.) voted against the repeal legislation. It now goes to President Donald Trump’s desk, where it is widely expected to be signed into law.

The consumer protection now under threat was created by a recent federal regulation, or “rule,” established by the Consumer Financial Protection Bureau, an independent federal agency. This rule bans companies from adding legal language known as “mandatory arbitration clauses” to financial product contracts like credit card contracts, for example.

Such clauses prohibit consumers from joining class-action lawsuits against financial service providers, instead forcing consumers to resolve disputes through arbitration.

The Senate’s vote came the day after the U.S. Department of the Treasury released an 18-page report that is critical of the arbitration rule as well as a 2015 CFPB study supporting the rule.

The Treasury contends that the rule does not satisfy legal requirements for banning the use of mandatory arbitration clauses under the Dodd-Frank Act. The Treasury’s report states the CFPB “failed to meaningfully evaluate whether prohibiting mandatory arbitration clauses in consumer financial contracts would serve either consumer protection or the public interest — its two statutory mandates.”

The arbitration rule

The Consumer Financial Protection Bureau first proposed its rule on arbitration agreements last year. The agency issued the final rule on July 10. At that time, CFPB Director Richard Cordray said of arbitration clauses:

“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.”

The rule defines arbitration as a dispute resolution process that relies on neutral third parties — rather than courts — to make final and binding decisions.

The rule went into effect Sept. 18, and it applies to contracts that are entered into on or after March 19, 2018 — unless the president signs off on the repeal legislation.

What it means for consumers

The U.S. House of Representatives passed the legislation to repeal the arbitration rule on July 25, shortly after the CFPB issued the rule. Now that the Senate has also passed that same legislation, it heads to the president’s desk.

Trump has already applauded the passage of the repeal legislation, Bloomberg reported Tuesday night, citing a White House statement:

“By repealing this rule, Congress is standing up for everyday consumers and community banks and credit unions, instead of the trial lawyers, who would have benefited the most from the CFPB’s uninformed and ineffective policy.”

Opponents of the arbitration rule, including the Treasury, have argued that unless the rule is repealed, it will line trial lawyers’ pockets while providing little or no help to consumers.

Sen. Elizabeth Warren (D-Mass.), who led opposition to the repeal legislation, according to Bloomberg, painted a different picture Tuesday:

“This bill is a giant wet kiss to Wall Street. Bank lobbyists are crawling all over this place, begging Congress to vote and make it easier for them to cheat consumers.”

If Trump signs the repeal legislation into law, the arbitration rule will effectively be repealed. The rule “shall have no force or effect,” as the repeal legislation itself puts it.

With the arbitration rule undone, the financial companies that were beholden to it will again be able to insert mandatory arbitration clauses into financial product contracts.

For example, the next credit card contract you sign could contain legal language that forces you to resolve any future disputes you might have with the credit card company through arbitration. In other words, if you are wronged by the company, you will not have the option of joining any class-action lawsuits against the company.

As CFPB Director Cordray put it in Bloomberg’s report:

“Wall Street won and ordinary people lost. This vote means the courtroom doors will remain closed for groups of people seeking justice and relief when they are wronged by a company.”

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