Congress could strip consumers of right to sue banks and credit card companies

We'll just put the entire financial sector on the honor system. What could possibly go wrong?

CREDIT: AP Photo/J. Scott Applewhite
CREDIT: AP Photo/J. Scott Applewhite

According to Sen. Elizabeth Warren (D-MA), senators could vote as soon as Tuesday on a proposal to strip consumers of their right to sue many banks and other financial companies. If the vote prevails, consumers are likely to lose their right to sue credit card companies and many other financial firms in a real court and be forced to bring suits in a privatized arbitration system that tends to favor corporate parties.

Additionally, the vote would permit many lenders to strip consumers of their right to bring a class action lawsuit against the lender.

The House already approved a similar measure, largely along party lines.

The vote concerns a Consumer Financial Protection Bureau (CFPB) rule that prohibits credit card companies, auto lenders, credit reporting companies such as Equifax, and certain other financial firms from “using an agreement with a consumer that provides for arbitration of any future dispute between the parties to bar the consumer from filing or participating in a class action concerning the covered consumer financial product or service.”


Forced arbitration agreements are a common tactic used by companies seeking to avoid liability. Typically, they require any dispute between the company and its customers (or, often, its employees) to be resolved before a private arbitrator rather than a judge. Companies will frequently refuse to do business with consumers who do not agree to sign away their right to sue.

Even if consumers are given a choice, most don’t even realize that they’ve signed their rights away. A 2015 CFPB study determined that “in the credit card market, card issuers representing more than half of all credit card debt have arbitration clauses – impacting as many as 80 million consumers.” Yet, “fewer than 7 percent recognized that they could not sue their credit card issuer in court.”

Forced arbitration clauses are frequently coupled with provisions banning class actions — a practice the Supreme Court endorsed in 2011. This allows companies to engage in widespread illegal activity, so long as they only bilk their customers out of a few dollars at a time.

Consider, for example, the facts in AT&T Mobility v. Concepcion, the 2011 case endorsing class action bans.

This case concerned a cell phone company that charged some of its customers $30.22, despite allegedly promising not to. A company can make a ton of money if it collects an additional thirty bucks from millions of customers.


Without class actions, companies are likely to get away with this practice scot-free. Virtually no one is going to file a lawsuit over $30.22. The cost of hiring a lawyer will massively exceed that amount.

Class action suits, on the other hand, allow all of these customers to join together into a multi-million dollar suit — one that will attract excellent legal counsel because of the large amount of money involved.

CFPB’s regulation prohibiting forced arbitration clauses and class action bans is possible because the agency is still led by Richard Cordray, an Obama appointee whose term does not expire until 2018.

Meanwhile, the Trump administration has cast its lot with banks that want to take advantage of forced arbitration. On Monday, the Treasury Department, which is led by a secretary with a history of dubious lending practices, issued a report claiming that CFPB’s rule would drive up costs to consumers by increasing the financial industry’s litigation costs. That report relied on a review by the Office of the Comptroller of the Currency, which is led by a banking industry attorney.

CFPB’s 2015 study, by contrast, “analyzed changes in the total cost of credit paid by consumers of some credit card companies that eliminated their arbitration clauses and of other companies that made no change in their use of arbitration provisions.” It “found no statistically significant evidence that the companies that eliminated their arbitration clauses increased their prices or reduced access to credit relative to those that made no change in their use of arbitration clauses.”

Congress faces a tight deadline if it wants to overturn the CFPB rule. The rule was finalized in July, and a law known as the Congressional Review Act permits Congress to disapprove of the rule up to 60 legislative days after it becomes final. That clock is likely to run out in mid-November.


Should Congress disapprove of the CFPB rule, the Congressional Review Act would prevent CFPB from issuing a new rule “in substantially the same form.” Thus, CFPB could permanently lose much of its authority over forced arbitration and class action bans, even in future administrations.