Congress just killed a rule that made it easier to sue your bank



Myles Ma

Myles Ma

Senior Managing Editor

Myles Ma is a health care expert & personal finance writer for Policygenius. He edits the Easy Money newsletter.

Published October 25, 2017|2 min read

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If your bank or credit card company has cheated you, you can forget about suing them. Most likely, you agreed never to join or file a class action lawsuit when you signed a contract to use their services. Many financial companies include mandatory arbitration agreements in their contracts with consumers. These clauses mean you'll instead have to bring a claim alone, outside the court system.

The Consumer Financial Protection Bureau tried to change this. The federal agency issued a rule in July allowing people to file or join lawsuits against financial companies. But Congress shot the rule down Tuesday.

The Senate voted 51 to 50 to pass a bill officially rescinding the CFPB rule on arbitration agreements, following a House vote in July. Vice President Mike Pence broke the tie. It now awaits the signature of President Donald Trump, who has already praised the bill's passage.

Class-action lawsuits vs. arbitration

The CFPB introduced its rule in July after conducting a five-year long study of mandatory arbitration agreements starting in 2010. It found consumers forced into individual arbitration fare worse when taking on companies and that class-action lawsuits win more money for more people. While arbitration earns more on average, almost no one actually goes through arbitration unless lots of money is at stake, while a group lawsuit can win small amounts for many people, the agency found.

"When a bank charges illegal fees to millions of customers and then blocks them from suing together, a result is not millions of individual claims, but zero," said Richard Cordray, CFPB director.

Put another way, arbitration makes screwing people over less risky for banks and credit companies, an argument consumer advocates have long made against the clauses.

Critics say class action suits benefit lawyers more than consumers, but the CFPB found only 20% of company payouts go to legal costs, and only if the suits are successful.

'Extraordinary costs'

Republicans, however, criticized the methodology of the study and the CFPB itself. And the Treasury published a competing study that said the bill would "impose extraordinary costs" on businesses and that many class action lawsuits have no merit. Sen. Richard Crapo of Idaho said on the Senate Floor a bipartisan commission should take over the agency from Cordray.

"The CFPB failed to demonstrate that consumers will fare better in light of its arbitration rule," he said. "In fact, they may be worse off."

It's hard to see how they could be. Mandatory arbitration agreements, by definition, limit consumer choice. The CFPB rule sought to expand that choice; there was nothing stopping people from opting for arbitration if that's what they wanted. Now, if your bank or credit card company harms you, you are likely legally bond to arbitration. Good luck with that.

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