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28 October 2017, 12:55 | Kenneth Drake
Senate Republicans Vote to Eliminate Rule That Would Allow Consumers to Sue Financial Institutions
Perhaps the most pernicious aspect of the forced arbitration clause is that most consumers don't even realize they are giving up their day in court when they sign on the dotted line.
CFPB Director Richard Cordray, shown on Capitol Hill in 2013, called the vote a "giant setback" for consumers that preserves a "two-tier" system of justice where consumers are shut out of court.
The vote late Tuesday caps a fractious fight between the CFPB and the industry in which it was unclear whether Republicans would be able to gather the necessary support in the Senate.
Customers must agree to the clauses as a condition of opening accounts, saying they will take any disputes to closed-door arbitration instead of joining class-action lawsuits, where complainants band together to share litigation costs.
"And it actually increases the benefit that flows to the consumer, as opposed to the alternative, which is class action lawsuits, which enriches lawyers where consumers get pennies on the dollar". The Republican-dominated House approved the resolution on July 25.
Repealing the rule would be a victory for Republican leaders and CFPB critics who've long tried to curtail the agency's power and influence. Republicans, though, quickly crafted a bill to kill the rule. On Monday, the Treasury Department blasted the measure in a report, arguing that plaintiffs' lawyers get nearly all the money from lawsuits, while individual consumers get next to nothing.
It was a huge win for banks, who feared a flood of costly lawsuits. John Cornyn, R-Texas, in floor debate on Tuesday.
The vote was 50/50, with the tie-breaking aye cast by Vice President Pence.
Arbitration also allows companies to hide their misdeeds, allowing them to discreetly address problems that some consumers discover on a small scale while the problem may persist for many others.
With Pence's vote, the Trump administration sent a clear signal: It isn't anxious about looking like it's doing the industry's bidding, even after campaigning a year ago on a populist, anti-Wall Street message.
Lawmakers claim the legislation imposed "extraordinary costs" on businesses, which could be passed on to customers. 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. "It robs consumers of their most effective legal tool against corporate wrongdoing", he said.
Cordray said Treasury got it wrong. The rule was set to go into effect in early 2018.
It has also found that class-action lawsuits provided about $220 million per year to 6.8 million consumers-in the cases it studied-which works out to just $32 per consumer, on average.
"A business would never enter into an agreement like this, whether with suppliers or other companies", Prentiss Cox, a University of Minnesota Law Professor, says. That investigation by the CFPB eventually led to the revelation that Wells Fargo Dealer Services was charging auto borrowers for insurance they didn't need. Wells Fargo, like other lenders, had customers sign mandatory arbitration agreements when they opened their initial accounts, and those agreements appeared to govern the subsequent disputes.
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".
Equifax initially turned to arbitration clauses in the face of its cyber hack but public pressure and threats from state attorneys general forced it to drop the requirement for 145.5 million consumers affected by the breach.
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