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CFPB Issues Rule Making It Easier for Consumers to Sue Banks

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  • Measure restricts use of arbitration to block class-actions
  • Industry groups urge Republican Congress to overturn measure

The U.S. Consumer Financial Protection Bureau is making it easier for customers to sue banks, a move sure to rile Wall Street and congressional Republicans.

Financial firms will be restricted in using mandatory arbitration to block class-action lawsuits, the CFPB said in a statement Monday. Clauses requiring arbitration to settle disputes are inserted routinely in contracts for credit cards, payday loans and other financial products.

“These clauses allow companies to avoid accountability by blocking group lawsuits and forcing people to go it alone or give up,” CFPB Director Richard Cordray said in a statement. “Our new rule will stop companies from sidestepping the courts and ensure that people who are harmed together can take action together.”

Lawmakers have 60 legislative days from the time they formally receive the rule to overturn the bureau’s decision. Republicans have tried to use the Congressional Review Act, which allows challenges to newly issued regulations, to roll back a number of Obama-era rules, including CFPB’s plans to implement tougher standards for prepaid debit cards.

“As a matter of principle, policy and process, this anti-consumer rule should be thoroughly rejected by Congress,” Representative Jeb Hensarling, the Texas Republican who leads the House Financial Services Committee, said in a statement.

Essential Tool

Consumer advocates cheered the arbitration rule, arguing that class-action suits are an essential tool for helping harmed customers win relief and holding companies accountable for bad behavior. Finance-industry groups were quick to raise concerns, arguing that curbing arbitration will lead to higher legal costs that banks ultimately will pass on to consumers. Banking trade groups echoed Hensarling’s call for Congress to reverse it.

“Arbitration has long provided a faster, better and more cost-effective means of addressing consumer disputes than litigation or class-action lawsuits,” said Richard Hunt, president of the Consumer Bankers Association. “Given the longstanding benefits of arbitration, we encourage Congress to move swiftly and overturn this anti-consumer rule.”

In an unusual move, the head of a key banking regulator wrote to Cordray to raise concerns about the rule. Keith Noreika, the acting Comptroller of the Currency, asked that the CFPB share data used to develop its arbitration rule, according to a letter dated Monday that was obtained by Bloomberg.

Share Data

“We would like to work with you and your staff to address the potential safety and soundness implications of the CFPB’s arbitration proposal,” Noreika said in the letter. “That is why I am requesting the CFPB share its data.”

Noreika cited a section of the Dodd-Frank Act that gives the Financial Stability Oversight Council -- a panel of regulators headed by the Treasury secretary -- power to set aside any CFPB rule that can be shown to put the safety of the wider financial system at risk.

Dodd-Frank required that the consumer bureau study the use of mandatory arbitration clauses, according to the agency. CFPB found that hundreds of millions of contracts include arbitration provisions and that companies have used the clauses to keep fights out of court almost two-thirds of the time. Very few consumers even consider bringing individual actions against financial-service providers in court or in arbitration, the study showed.

The new rule will cover new agreements for products such as credit cards, auto loans, credit reports and even mobile phone services that provide third-party billing. Companies can still include arbitration clauses in contracts, but they must state that those can’t be used to stop individual consumers from joining class-action cases.

It is also possible that industry groups will sue to overturn the CFPB rule. Groups including the U.S. Chamber of Commerce have said arbitration is a valuable tool to prevent frivolous, expensive lawsuits that often don’t do much to benefit borrowers.

Consumer advocates say restricting arbitration clauses will deter bad actors and force companies to reconsider certain activities because consumers will be more inclined to sue.

“The consumer agency’s rule will stop Wall Street and predatory lenders from ripping people off with impunity, and make markets fairer and safer for ordinary Americans,” Lisa Donner, executive director of Americans for Financial Reform, said in a statement.

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