Senate blocks rule letting consumers bring class-action lawsuits

Executive Branch at War: Treasury Department Launches Attack on the Consumer Financial Protection Bureau

A CFPB study found that only two percent of consumers with credit cards would pursue legal action in a small-dollar dispute. Angry at a company like Equifax?

Democrats and progressive political groups have fiercely defended the rule, insisting it would ensure vulnerable consumers have their day in court when they've been defrauded by banks or credit card companies. Elizabeth Warren (D-Mass.) said repeal would amount to a "giant wet kiss to Wall Street", adding that Congress had been crawling with lobbyists in the lead up to the vote. So-called "forced arbitration" clauses mandate the customers resolve any disputes with the firm through a third-party mediator, and ban them from suing the company.

Sen. Patrick Leahy, D-Vt., has been a vocal supporter of the rule, issued by the Consumer Financial Protection Bureau in July, which limited the use of the arbitration process by financial companies.

But the federal watchdog agency got a lot of push-back.

"Awards made under arbitration are bigger and better for the person that's been harmed as opposed to what that same person might get in class action lawsuits", said Grassley. But now millions of Americans won't get their day in court, and Saunders says that's just not right.

Levin asserts that arbitration is a clear victor: "The average recovery by a consumer in arbitration in a case that ended up being decided by an arbitrator was very close to $5,400".

Senator Chuck Grassley said consumers are better off without the rule.

ARNOLD: Siding with Wall Street, though, Republicans argued that class-action lawsuits give a lot of money to trial lawyers and don't do that much to help consumers.

Advocates maintain that consumers need the ability to sue.

ARNOLD: Lauren Saunders is associate director at the National Consumer Law Center.

"Even when there's a class action ban, sometimes companies are forced through public pressure to resolve class actions", says Saunders. Class-action lawsuits, rather, can benefit consumers by forcing a company to change its broader pattern of behavior. Forced arbitration nearly always works out in favor of corporations since they can avoid the legal costs of going to trial, and they routinely pay much less in settlement money than they would if the matter went to court.

Mandatory-arbitration clauses already are prohibited in mortgage contracts, by the 2010 Dodd-Frank financial reform act. If you're opening a bank account or applying for a new credit card, look for one without an arbitration clause in its fine print. Meanwhile, Sen. Elizabeth Warren of Massachusetts, Senate Minority Leader Chuck Schumer of NY and other Democrats had repeatedly argued that repealing the regulation would allow high-profile scandals at Equifax Inc. and Wells Fargo & go unpunished.

Equifax later modified some of its terms to remove the arbitration clause, and also indicated in its TrustedID service FAQ that the clause "applies to the free credit file monitoring and identity theft protection products, and not the cybersecurity incident".

If you do decide to go through arbitration, the best advice is to be prepared. Had the rule taken effect, it would have prompted the filing of more than 3,000 new class-action lawsuits over the next five years, the report said.

"Both have special consumer rules created to ensure that due process will be followed and that consumers will be treated fairly", Levin says.

Cornyn called arbitration "a widely accepted method of resolving disputes between consumers and banks and other financial institutions".

"Arbitration will prevent major liability over small transactions", he said.



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