On Tuesday, the financial-services industry scored a huge victory over the trial lawyers and consumer advocates when the Senate narrowly passed legislation, previously passed by the House, to kill the Arbitration Agreements Rule formulated by the Consumer Financial Protection Bureau (CFPB).
This rule would have prohibited mandatory arbitration clauses in financial contracts, such as credit card agreements and car loans. Mandatory arbitration effectively bars consumer lawsuits against lenders and other financial-services providers.
{mosads}The CFPB adopted this hotly disputed rule in July, under authority granted to it in the Dodd-Frank Act, to restrict mandatory arbitration of consumer disputes.
Congress revoked the rule in accordance with the Congressional Review Act, which enables Congress to nullify a regulation by majority vote within 60 working days after the regulation is announced. President Trump has indicated that he will sign this revocation.
The arbitration rule was pushed by CFPB Director Richard Cordray, with the strong backing of Sen. Elizabeth Warren (D-Mass.), who previously championed the Dodd-Frank Act’s creation of the CFPB. The financial services industry strongly opposed the rule.
Partisan politics, of course, played a powerful role in the debate over the arbitration rule. The vote to revoke the rule was largely along party lines and occurred in the context of the ongoing Republican initiative to restructure the CFPB while forcing out Director Cordray, who may yet run for governor of Ohio as a Democrat.
The CFPB cannot revive its arbitration rule without congressional approval, which would require, as a practical matter, 60 votes in the Senate.
That is highly unlikely for the foreseeable future, which means that mandatory arbitration will continue to be widely used for resolving consumer financial disputes, since financial services providers do not want to risk being sued by dissatisfied customers. However, the debate over the relative merits of mandatory arbitration versus permitting consumers to sue over disputed charges will hardly cease.
Central to the debate is the question of the fairness of mandatory arbitration, which is seen by consumer advocates as unfair to consumers who believe that arbitration is usually tilted against them.
Financial firms argue that not only are class-action lawsuits costly, but that class-action lawyers capture most of the awards granted by courts and in case settlements, with consumers getting only a pittance.
While consumer advocates almost certainly will not abandon their efforts to ban mandatory arbitration of consumer complaints, the challenge to financial firms is to improve their arbitration procedures so as to reduce consumer complaints about unfair treatment in resolving disputed charges and fees.
If consumer complaints do not subside materially, when the political pendulum swings backs toward the Democrats, as inevitably it will, then Congress could reverse itself and give the CFPB, if it is still around, or other regulators the authority to regulate or even abolish mandatory arbitration. Time will tell.
Repeal of the rule has set off an unrelated debate — did this action indicate an increased willingness by Congress to repeal or moderate other aspects of Dodd-Frank?
Many such initiatives have been underway since shortly after Dodd-Frank was enacted seven years ago, but not too much should be read into the repeal of the arbitration rule for the pros and cons of this rule differ significantly from the debates over other provisions in Dodd-Frank.
Bert Ely is a principal of Ely & Company, Inc., where he monitors conditions in the banking industry, monetary policy, the payments system and the growing federalization of credit risk.