Senate Republicans on Tuesday killed a new rule that would have made it easier for Americans to file class-action lawsuits against big Wall Street banks.
Vice President Mike Pence cast a critical vote to break a 50-50 tie, giving the Street its first major victory since the Trump administration took office in January.
Implications for consumers
In the regulatory overhaul following the housing slump, Congress directed the Consumer Financial Protection Bureau (CFPB) to write the rule preventing financial firms from imposing arbitration when consumers wished to band together in class-action cases to resolve disputes.
For years, financial companies have included class-action waivers in new contracts offering a consumer financial product or service. The arbitration clauses forced consumers to waive their rights to join class-action lawsuits.
CFPB’s proposed rule, issued in July, would have banned financial institutions from inserting such clauses in standard contracts. Consequently, it would have restored individuals’ ability to pool resources and fight against banks and credit card companies in court.
“Tonight’s vote is a giant setback for every consumer in this country,” Richard Cordray, the director of the consumer bureau, said in an emailed statement to MagnifyMoney. “Wall Street won and ordinary people lost.”
He added, “As a result, companies like Wells Fargo and Equifax remain free to break the law without fear of legal blowback from their customers.”
When a company includes a mandatory arbitration clause in a contract, it generally means disputes will be handled as individual cases in small claims court or settled outside the court system, through arbitration. A neutral third party — an arbitrator or panel of arbitrators — listens to the arguments and decides on a resolution.
Arbitration is said to be faster, simpler and cheaper than litigation. But opponents of arbitration say its downsides include questionable neutrality on the arbitrator’s part, a lack of transparency and a lack of recourse. For example, in a court case, a losing party could appeal — an option that doesn’t exist in arbitration.
The CFPB argues that reducing consumers’ options to private arbitration or an individual lawsuit makes it easy for companies to avoid accountability for actions that can affect thousands or millions of people.
The Trump administration and Republicans have pushed to curtail the CFPB as part of a broader effort to weaken the Obama administration’s tighter federal grip over financial institutions.
The arbitration rule had sparked a political firestorm in Washington. Over the summer, members of the Senate Banking Committee pledged that they would take the unusual step of filing a Congressional Review Act Joint Resolution of Disapproval to overturn the CFPB rule.
Rep. Jeb Hensarling, D-Texas, introduced a companion measure in the House.
Under the Congressional Review Act, Republicans had about 60 legislative days to overturn the rule. In ensuing months, financial institutions and their Republican allies in Congress joined forces, making serious efforts to block the arbitration rule.
The Treasury Department on Monday released a report against the rule. “The Bureau failed to meaningfully evaluate whether prohibiting mandatory arbitration clauses in consumer financial contracts would serve either consumer protection or the public interest — its two statutory mandates,” according to the report.
On Tuesday, the White House applauded the move by Senate Republicans.
“The evidence is clear that the CFPB’s rule would neither protect consumers nor serve the public interest,” the White House said in a statement. “Rather, under the rule, consumers would have fewer options for quickly and efficiently resolving financial disputes.”