Consumer protection rule latest battle with Cordray-led agency

Republicans are sharply criticizing a rule that would allow consumers to file class-action lawsuits against financial companies – the latest battle in an ongoing war between the GOP and a consumer watchdog headed by former Ohio Attorney General Richard Cordray.

In July, the Consumer Financial Protection Bureau issued a rule barring financial service companies from inserting fine print into contracts that would effectively prevent customers from filing class-action lawsuits against them. Instead, consumers with beefs are forced into arbitration – a process that involves a third party who hammers out an agreement between the company and the aggrieved.

Supporters of the rule say few customers are willing to enter arbitration over a bank that erroneously charges, say, $20 and won’t refund the money. But if a bank is doing it systematically, a class action lawsuit can stop them from ripping off hundreds, maybe thousands of consumers – and can also keep them from ripping off people in the future.

The clauses, said Cordray, “block groups of consumers from taking action together.” Without being able to sue, he argues, “no justice is done, no deterrent achieved, no oversight of banks can be had.”

Opponents, meanwhile, argue that the rule not only presents an easy payday for trial lawyers – it’s a symbol, they say, of an agency with too much unchecked power.

Those critics – including Republicans and the banking industry – have been foes of the CFPB almost since the agency opened its doors in 2011. Because Cordray is appointed to a five-year term and Congress has no financial power over his agency, they argue that he is a one-man legislating machine.

“Everything about this says it’s an abuse of power,” said Rep. Warren Davidson, R-Troy. He said Cordray “doesn’t ask for the law to be changed. He just issues an edict and expects that it’s going to be okay.

“He’s not been elected to do this role,” he said. “He’s not even accountable to Congress or the president.”

Some, including Rep. Jeb Hensarling, R-Texas, chair of the House Financial Services Committee, have called for Cordray to be fired. Short of that, though, critics are content in trying to undo the agency’s work.

In July, the House voted 231-190 to overturn the arbitration rule. The Senate has until late September to follow suit. Ohio Democrats opposed overturning the rule; Ohio Republicans supported doing so.

Critics say the CFPB itself has undermined its defense of the rule, issuing a report finding that consumers who prevailed in arbitration recovered on average $5,389 while those who joined class actions received $32. Trial lawyers on average raked in $1 million.

While arbitration is typically settled within a few months, they say, class action lawsuits can take years to resolve.

But proponents say that incidents such as Wells Fargo’s recent scandal – where it was found to have created millions of unauthorized accounts in the names of its customers – is evidence enough that consumers need to have the right to sue. They say that the new rule doesn’t ban customers from seeking arbitration – it just gives them another alternative.

Melissa Stegmen, a senior counsel for the Center for Responsible Lending, which supports the rule, said class action lawsuits are “far more effective” for consumers than forced arbitration and “keeps financial companies from exploiting consumers in the first place.”

While critics counter that class action lawsuits are a giveaway to trial lawyers, Stegman has another perspective. “Forced arbitration is a giveaway to predatory lenders and those who want to cheat consumers,” she said. “Because they’re able to continue their illegal conduct.”

“Critics say the CFPB itself has undermined its defense of the rule, issuing a report finding that consumers who prevailed in arbitration recovered on average $5,389 while those who joined class actions received $32. Trial lawyers on average raked in $1 million.

But that same study also found that just 16 people a year win arbitration cash awards, and most lose, owing the bank or lenders $7,725.The CFPB also found that over five years 34 million consumers won $2.2 billion in class actions after attorneys’ fees.”

Others insist the rule will merely result in unnecessary litigation.

Richard Hunt, president and CEO of the Consumer Bankers Association calls the rule “a gift to trial lawyers.”

“They’ll make millions off of each case,” he said. “In some cases, 50 percent of the monetary compensation goes to trial lawyers.”

He predicts the result will be that banking becomes more expensive.

“There will be higher litigation costs to each bank for no reason,” he said. “And the costs may be passed onto the consumers.”

Brian Quigley of the U.S. Chamber of Commerce said while the rule doesn’t prohibit consumers from seeking arbitration, companies “are not going to have two systems” of dealing with consumers. It’s too costly.”

“The whole point of arbitration is to try to build a dispute resolution system that’s fast, efficient and more equitable to all parties, customers included, that doesn’t include all the processes of the court that bog down cases for years,” he said.

Quigley said most of the disputes credit card companies and banks have with consumers are individualized – not the sort of thing that can be addressed in class action lawsuits. “It’s unlikely there are 10,000 other customers that have exactly the same problem that you do that can be bundled into a class action,” he said.

“This rule will ultimately harm lots of customers,” he said. “because the effect is they will have no recourse.”

Sen. Sherrod Brown, D-Ohio, said despite the fact that nearly every Republican on the Senate Banking Committee has cosponsored the Senate bill to undo the rule, “there’s a reluctance among a lot of Senate Republicans” to actually undo it. Many, he said, would prefer to “just let it die,” Brown said.

He said that for years, financial services have drawn up such contracts knowing that few customers will read them and those that do won’t understand that they’re giving up their right to sue.

Still, if Senate Republicans press on to undo the rule “I will be leading the opposition,” he said.

Lauren Saunders, associate director of the National Consumer Law Center, said the issue is a constitutional one: People, she said, are owed the right to a day in court under the 7th Amendment.

In the Wells Fargo case, for example, the bank created 3.5 million fake accounts. “It’s insane that people had to go one by one to secretive arbitration,” she said.

And she said the notion that Cordray authorized the rule without congressional input is just “more falsehood.” Congress, she said, ordered the agency to do a study on forced arbitration in 2010, giving them the authority to prohibit arbitration if it was in the public interest. The agency, she said, did not one, but two studies. The rule, she said is based on the findings of those studies.

The agency, she said, “is doing its job to protect consumers.”

About the Author