CFPB Director Richard Cordray tips the scales of consumer justice (illustrated)

Nothing says America like bald eagles, apple pie, and lawsuits. And by that last measure, big banks have become pretty un-American.

For years, they’ve skirted class-action lawsuits simply by writing into their terms of service that, well, you can’t do that. Opening a credit card or bank account simply means you have to play by their rules. By yourself.

If you don’t like it, you have to bring your complaint to an out-of-court process called arbitration — there is no jury, just an impartial arbitrator (usually a retired judge, and usually hand-picked by the bank) who hears both sides and makes a binding decision that is kept quiet.

When that’s written into the rules, it’s called forced arbitration and businesses love it. They get to continue their bad practices and can shove a little hush money at noisemakers if they happen to lose a case in arbitration here or there. It’s far cheaper, quicker, and less damaging to the company’s reputation than going to court and ultimately paying out millions to people who say they were wronged.

Unfortunately for the financial industry, the meddling Consumer Financial Protection Bureau just took forced arbitration away — and Republicans probably can’t stop it.

New rule killing old rule

“Many consumer financial products like credit cards and bank accounts have arbitration clauses in their contracts that prevent consumers from joining together to sue their bank or financial company for wrongdoing. By forcing consumers to give up or go it alone – usually over small amounts – companies can sidestep the court system, avoid big refunds, and continue harmful practices,” the CFPB says.

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Now, the CFPB will still allow arbitration clauses — but won’t allow language that prohibits class-action lawsuits. Arbitration just isn’t as effective as the legal system, the CFPB says.

The agency spent a lot of time studying arbitration and released a study two years ago about it, ultimately leading up to this new rule. It concluded the obvious — very few consumers are able or willing to sue big banks on their own, so very few do.

Meanwhile, class-action suits are easy to join: At least 34 million people reached settlements worth $1 billion over the five-year period the CFPB studied. “Conversely, in the roughly one thousand cases in the two years that were studied, arbitrators awarded a combined total of about $360,000 in relief to 78 consumers.”

The bankers’ argument is bunk

Banks are grumbling about the new rule, because it obviously makes doing business more expensive. But the case they make is an interesting one: Consumers make more money through arbitration. The talking point circulating from the organizations representing big banking goes like this:

CFPB’s own study shows the average consumer receives $5,400 in cash relief using arbitration and just $32 through a classaction lawsuit.

That’s true. And also completely misleading. Because…

  • Both numbers assume consumers win, but because arbitration is so secretive we have little idea how often that happens.
  • Plus, consumers don’t sue on their own, and many probably mistrust arbitration. So they would get $0 instead of $32.
  • That number doesn’t factor in the financial harm all those consumers — and others — stop suffering when the bank gets a black eye and has to change its practices.

And one more big reason: That number also doesn’t factor in the significant deterrent the mere threat of class-action lawsuits represents. It’s just like speeding tickets — fewer people speed when they think they’re gonna get pulled over for it. No bank wants a few million speeding tickets, so they’re not going to cut corners on consumers.

If Republicans don’t like it, they have to legislate

Republicans don’t like the CFPB. Trump doesn’t like the CFPB. But he’s also out of opportunities to simply undo CFPB rules. He could try to simply fire CFPB director Richard Cordray, but he’s on shaky legal ground if he tries — and the last thing Trump wants right now is to hire yet another lawyer. (On the other hand, anything to get away from Russia headlines?) He also probably doesn’t want to give Cordray the satisfaction. Rumor is, he plans to run for governor of Ohio, and a fight with Trump would probably help more than hurt.

If Republicans in Congress want the CFPB to change, they have to pin their hopes on an unpromising case challenging the CFPB’s constitutionality. (If the case somehow makes it to the Supreme Court, Trump’s justice pick Neil Gorsuch might show banks some sympathy.) The only other option they have is to actually do their job and pass some laws.

That seems like an even longer shot — they can’t even pass healthcare reform after spending seven years railing against Obamacare. They avoid town halls with their constituents. Imagine if they proposed legislation making it easier for banks to rip us all off.

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Article last modified on August 8, 2017. Published by Debt.com, LLC .