Lawmakers who regularly claim to love the Constitution and espouse their trust of the American consumer have done both a disservice, passing a resolution that makes sure that bank and credit card customers can be blocked from exercising their constitutional rights to a day in court.
In an unsurprising, but still highly disappointing move, the U.S. Senate voted late Tuesday evening 50-50 — with Vice-President Mike Pence breaking the tie — to approve a resolution that, when signed by President Trump, will repeal a recently finalized consumer protection rule intended to ensure that consumers are able to bring class-action lawsuits against financial services companies.
No Democrats voted to repeal the rule. Sens. John Kennedy (LA) and Lindsey Graham (SC) were the only two Republicans to cross party lines and vote against repeal.
“Today’s vote means that big financial companies can lock the courthouse doors and prevent consumers who’ve been mistreated from joining together to seek the relief they deserve under the law,” said George Slover, senior policy counsel for our colleagues at Consumers Union. “Forced arbitration unfairly tips the scales in favor of banks, credit card companies and other financial firms at the expense of consumers who’ve been harmed by widespread corporate wrongdoing.”
What is “forced arbitration,” you may ask? Let us explain (or you can skim ahead if you’ve been through this tutorial before).
If you have a bank account, credit card, or any other consumer financial product, there’s a good chance that you have signed away your right to sue at least one — and possibly all — of these companies, even if their bad behavior amount to criminal actions or human rights violations.
These forced arbitration clauses in customer contracts do two things. First, they block the customer from having any legal dispute heard in a court of law. Instead, it must be sorted out in private arbitration. Second, they bar the customer from joining their complaint with any other customer, even if the wronged customers all have exactly the same complaint. This doesn’t just bar traditional class-action lawsuits; it prevents customers from entering into arbitration as a group.
Why do companies do this? Because they know that customers won’t go the arbitration route once they realize that the cost and hassle of going through an individual arbitration process is simply not worth it.
“Who’s going to pay $200 [to file an arbitration dispute] just to challenge a $30 fee?” asked Sen. Elizabeth Warren (MA) on Tuesday evening shortly before the Senate voted on the resolution.
Federal appeals court Judge Richard Posner put this sentiment best in his 2004 opinion in Carnegie v. Household Int’l, when he noted that “only a lunatic or a fanatic sues for $30.”
But if one person who was harmed for only $30 can sue as a class representative on behalf of all wronged customers, then the lawsuit makes more sense. Only one plaintiff needs to stand in for all customers in a legal effort to hold the company accountable.
Supporters of forced arbitration like to point out that class-action settlements are typically small, on a per-defendant basis. But that’s because the damages are typically small on an individual basis. Should a bank be allowed to cheat customers out of $100 million just because it only comes out to $10 per customer?
Additionally, these supporters argue that arbitration cases result in larger payouts. Again, that’s because customers who choose to go through the expense and annoyance of entering the arbitration process are more likely to have suffered a more sizable harm.
The arbitration rule, as finalized by the Consumer Financial Protection Bureau in July 2017, would not have barred financial services companies from using arbitration. Instead, it sought to limit these companies’ use of arbitration to shut down class actions.
Sen. Mike Crapo (ID), whose campaign has received $2.23 million from financial services contributors in the current term, admitted during the debate on Tuesday that the CFPB rule still allows customers to enter into arbitration if they choose, as it may in some cases be the more expeditious way to resolve a dispute.
Yet Crapo repeatedly railed against the CFPB rule, claiming it “forces dispute resolution into class actions.” But that’s simply not true. The rule did not, in any way, require that customers enter file class-action lawsuits. It only tried to make sure that class-actions remained an option.
In a letter sent this week by Consumers Union to the Senate, CU’s Slover pointed out that the rule “in no way restricts the freedom of a lender and a consumer to agree to use arbitration as an alternative means for resolving a dispute – as long as they make that agreement after the dispute arises, when the consumer knows what is at stake and can decide whether the alternative being offered is fair and workable.”
Crapo, one of the few lawmakers to argue on Tuesday in favor of repealing the rule, also repeatedly made the false claim that the CFPB rule would wreak havoc on community banks and credit unions. But while trade groups representing small banks and credit unions have supported repeal of the bill, these small financial institutions would likely not be affected by the rule. Why? Because the overwhelming majority of them do not use forced arbitration.
In fact, according to the 2013 CFPB report on arbitration, only 8% of all banks offering checking accounts used forced arbitration clauses. However, those few banks are so large in size that they represented nearly 45% of checking account deposits.
Tuesday’s resolution uses the Congressional Review Act, a law that allows Congress to repeal new federal rules it disagrees with. Under the CRA, simple majorities in each chamber of Congress and the President must each sign off on a resolution of disapproval within a complicated 60-day window.
The House passed its resolution on a near party-line vote in July, only days after the rule was published in the Federal Register. The CRA repeal window was set to expire next week, and Senate Republican leadership had — as recently as only a few days ago — seemed resigned to not having the 50 votes it needed (with Vice President Pence breaking a tie). However, perhaps emboldened by a last-minute, unsolicited critique of the CFPB rule by the Treasury Department, Majority Leader Mitch McConnell decided to move forward with a vote today.
The resolution now goes to President Trump, who is expected to sign it.
Congressional Review Act resolutions can not be challenged in a court of law. Additionally, the law prevents the CFPB from issuing any new rule that is in any way similar to the one that is repealed.
“This vote marks a truly shameful moment in Congress. Just weeks after holding hearings on scandals of historic proportion, the Senate granted Equifax and Wells Fargo a Get Out of Jail Free card,” says Amanda Warner of Public Citizen (you may recognize Warner from her recent portrayal of Rich Uncle Pennybags). “Rather than pass meaningful legislation to help the the 145 million Americans harmed by the data breach, a slim Republican majority chose to take away our only chance at holding financial giants accountable. Surely, those 145 million voters will remember this betrayal.”