By Jacob Bielanski
Despite comments that it would allow banks to "rip off customers with impunity," a wide range of financial experts lauded a narrow Senate vote on October 24 that puts a Consumer Financial Protection Bureau rule on forced arbitration agreements only a signature away from near-permanent repeal. The measure narrowly passed along largely partisan lines in the Senate, 50-50, with Vice President Mike Pence filing the tiebreaking "Yes" vote.
The vote was passed by the House and Senate under the Congressional Review Act (CRA), and awaits a signature from President Trump. Under CRA rules, his signature will not only halt the rule from going into effect, but will also bar any federal agencies from enacting similar rules without congressional action.
Final rule. The forced arbitration rule became effective in September, but would have applied to arbitration clauses beginning March 19, 2018. It was designed to limit terms in consumer banking and other financial agreements that force consumers to settle disagreements through arbitration. Proponents of the rule, such as Center for Responsible Lending’s Senior Policy Counsel, Melissa Stegman, arguedthat the arbitration process is often a "rigged system," with no opportunity for appeal and with the arbitrator beholden to the banks for repeat business.
"These rip-off clauses deny Americans the freedom to seek justice through our court system—a right embodied by the Constitution's Seventh Amendment," Stegman said in a statement following the vote.
CFPB study. Critics of the rule, however, cited a CFPB study in arguing that arbitration awards were, on average, higher than court awards for consumers, and that arbitration settlements occurred faster than court settlements.
According to the CFPB’s 2015 study, arbitration awards were generally received within five months compared to the median of roughly 18 months for court cases; however, only a third of arbitration claims during the study period resulted in a decision, and of those that the CFPB could determine an outcome, only about 10 percent—roughly 32 cases—resulted in "affirmative relief." Meanwhile, the courts approved an average of 85 class settlements per year, amounting to an average annual relief amount of $540 million per year.
The Office of the Comptroller of the Currency also weighed in, heralding the vote as a move to avoid what it said "would have likely increased the cost of credit for hardworking Americans." The OCC had used the CFPB’s data to determine impact to credit costs. "The action by Congress is a victory for consumers and small banks across the country," said Acting Comptroller of the Currency Keith A. Noreika.
"This move to rein in an overgrown and unaccountable CFPB is a welcome one, and we eagerly await the president’s signature on this bill," U.S. Chamber President and CEO Thomas J. Donohue said in a statement following the vote.
Companies: American Bankers Association; Center for Responsible Lending; Consumer Bankers Association; Financial Services Roundtable; U.S. Chamber of Commerce
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