Like many Americans worried about the future of their jobs, Richard Cordray was recently forced to make a personal, public plea to President Donald Trump.
Cordray is not a factory worker or miner, however; he is the head of the Consumer Financial Protection Bureau, the federal consumer watchdog agency.
The CFPB chief was concerned that Trump would strike a landmark CFPB rule — perhaps the first of many such rule overrides — that gave consumers the ability to band together in class-action lawsuits against banks and financial institutions accused of wrongdoing. Previously, so-called “forced arbitration” clauses in contracts for credit cards and bank accounts compelled customers to enter into legal proceedings individually with financial institutions.
To the CFPB and its backers, the rule embodied the essence of the agency’s mission: giving ordinary Americans more tools to protect themselves, and their financial livelihoods, from banks and lenders trying to nickel and dime consumers.
The Republicans in charge of Congress, along with the financial services industry, did not see it that way. They framed the rule as an overreach by unelected bureaucrats and a giveaway to trial lawyers.
In his last-ditch plea to Trump, Cordray appealed to Trump’s self-branding as a champion of working people. “I think you really don’t like to see American families, including veterans and service members, get cheated out of their hard-earned money and be left helpless to fight back,” he wrote.
Trump was not moved: On Nov. 1, he signed the bill overturning the CFPB rule. The termination of the arbitration rule is the clearest example yet of how eager Washington’s new Republican leadership is to limit the CFPB’s authority and undo the policy it has put in place — and advocates of the embattled agency fear this is just the start.
Immunity for banks?
The CFPB’s rule on forced arbitration was one of Republicans’ first targets, and their first successful effort in 2017 to roll back policy — though that victory ultimately did not come easily.
Like other businesses — phone companies, for example — financial institutions relied heavily on forced arbitration clauses to protect themselves from costly class-action lawsuits. They would place language in contracts that forced consumers, if they wanted to open a credit card or savings account, to accept terms that stripped them of the ability to band with others with similar grievances in a class-action suit if they had a problem with the company.
Instead, the contracts mandated that consumers proceed with their disputes through an arbitration process, in which a resolution is reached outside of court between the consumer and the company, facilitated by a third-party entity, or arbitrator.
For disputes in which a lot of money is at stake, arbitration — which requires a consumer hiring lawyers and taking the time to navigate the process — can make sense. The CFPB commissioned a study on arbitration in 2015, and found that in a sample of disputes, consumers were granted over $5,300 on average, a far greater return than the typical class-action suit yields.
However, most disputes that consumers have with banks involve far less money — a $50 or $100 overdraft fee, for example. According to Prentiss Cox, a professor at the University of Minnesota and a member of the CFPB’s Consumer Advisory Board, these kinds of disputes don’t have enough money at stake for individual consumers to justify hiring lawyers to navigate arbitration.
“Say you overcharged half a million people $100,” Cox explains. “You just made $50 million. Who can afford to litigate the issue over $100? Nobody.”
The CFPB study found that just 2 percent of consumers with credit cards would consider hiring an attorney to go to arbitration over a small-dollar dispute with their bank. In the view of the bureau and other like-minded people, this state of affairs has given banks undue protection, and has deprived consumers of options to recover funds — of whatever amount — they may have lost in dealing with them.
“It’s basically immunity from liability for violating the law,” Cox says. Class-action suits, meanwhile, can potentially benefit any consumer wronged by a particular financial practice, even if they do not participate in the litigation themselves.
As early as summer 2016, the CFPB was publicly discussing its plans to prohibit mandatory arbitration clauses, and by July 2017 the rule had been officially rolled out. It explicitly gave consumers the right to band together in class-action suits, specified how companies could use arbitration clauses going forward, and put in place transparency requirements so the public could better understand how arbitration works.
At the time, Democrats hailed the CFPB’s move as a significant victory: Sen. Al Franken called it a “game-changing move [that] will help shift power back to the American consumer and help ensure that you don’t have to sign away your rights when you sign up for a credit card or checking account, take out a private student loan, or borrow from a payday lender.”
Republicans waste no time
The ink had barely dried on the rule before Republicans, and the financial industry lobby, sprang into action against it.
The CFPB, which is headquartered across the street from the White House, has long been a bête noire for Republicans. It is the brainchild of Massachusetts Sen. Elizabeth Warren, a creation of the 2011 Dodd-Frank financial reform legislation and a signature achievement of Barack Obama’s administration.
Since its founding in 2011, the CFPB has taken sometimes aggressive action against financial institutions that have wronged consumers: In September 2016, it fined Wells Fargo $100 million after that bank created unauthorized accounts for customers to meet sales goals; in 2013, it fined Ally Financial $80 million for charging minority customers higher interest rates for auto loans. Currently, the CFPB has more than 1,600 employees and a $600 million annual budget, which is appropriated through a fixed formula set by the Federal Reserve.
Republicans believe the CFPB is the embodiment of regulatory overreach, and they frequently describe it as a powerful bureaucracy that is not accountable to the people. In the past, they have proposed replacing its powerful director with a board, and giving much more control over its funding to congressional appropriators.
In arguing against the arbitration rule, Republicans claimed it would spark unintended consequences that would ultimately hurt consumers more than help them. The U.S. Treasury Department, led by former Goldman Sachs executive Steven Mnuchin, issued a report that claimed the CFPB rule would prompt thousands of new class-action suits against companies, costing them $500 million in legal fees that would be passed on to consumers.
Critics of the rule have also framed it as a windfall for trial lawyers, who are frequent targets for conservatives, arguing it would benefit them more than it would ordinary consumers.
The House of Representatives wasted no time in trying to block the rule, voting in July to kill it by a margin of 231 to 190. Echoing his party’s line, 3rd District Rep. Erik Paulsen called the move “a common-sense fix to a regulation that was created by unelected bureaucrats rather than the usual legislative process. If we want to protect consumers, we should make sure we’ve looking out for their interests rather than those of trial lawyers.”
It was not until late October that the Senate voted to kill the CFPB rule — one that required a tiebreaker from Vice President Mike Pence after two GOP senators joined Democrats in voting to preserve the rule.
Senate Majority Leader Mitch McConnell reportedly wanted to schedule the vote earlier, but may have delayed it due to Capitol Hill hearings about a data breach at credit reporting agency Equifax — a company that made particularly aggressive use of forced arbitration clauses.
What does it mean for the CFPB?
In the wake of Trump officially terminating the CFPB’s rule, congressional Democrats voiced their displeasure, and vowed to keep fighting for the ability of consumers to bring class action lawsuits against banks — even if that effort will be an uphill climb in a Capitol dominated by Republicans.
In a statement to MinnPost, Franken called the overriding of the rule a “bad move,” and means that “holding big corporations accountable borders on the impossible.”
“Corporate America — including Wall Street firms, payday lenders, credit bureaus like Equifax, and big banks like Wells Fargo — has done everything it can to lock Minnesota consumers into contracts that limit their legal rights,” he said. “The CFPB rule would have helped fix this problem, but it was killed when deep-pocketed special interests were able to sway Republicans in Congress.”
First District Rep. Tim Walz, who has advocated for increased oversight of the CFPB in the past, said he “totally disagreed” with the GOP’s move.
“I think at times we need a little more regulatory humility, but I also agree that the game is stacked, in many cases, against the consumer, and having some of these rules in place helps them,” he said.
Democrats are concerned that the GOP’s win on forced arbitration, however narrow, could portend further blows to the CFPB in the Trump era. Walz forecasted that efforts to weaken the agency and its policies won’t be gradual, but rather “pretty dramatic, which is unfortunate.”
Fifth District Rep. Keith Ellison, one of the agency’s most vocal supporters in Congress, said that Republicans’ votes on arbitration should play into the 2018 election and beyond. “The public needs to know,” he said. “There’s an election next year. We should just truth on ‘em, say, ‘This is how they voted against you, and if you got ripped off by Wells Fargo, Equifax, any of these big companies, these people are not on your side.’ ”
Sixth District GOP Rep. Tom Emmer, a member of the House Financial Services Committee and a vocal CFPB critic, said the larger issue is the constitutionality of the bureau’s structure. “The CFPB is made up by unelected Washington bureaucrats who have no accountability, led by an unelected and equally unaccountable chair, with little transparency or oversight to the American people,” Emmer said.
The D.C. Court of Appeals is expected to soon issue a consequential ruling in a case challenging the CFPB’s constitutionality, which focuses on whether its director has too much power. Emmer said “the CFPB Arbitration Rule and all rulemaking efforts from the CFPB should be halted until these cases are reviewed and the appropriate checks and balances over this bureaucratic entity are installed.”
There is an important new rule from the CFPB that could prompt another round of conflict: In October, the bureau finalized a long-awaited rule cracking down on payday lenders, which frequently target working-class people with short-term, high-interest loans that can leave them saddled with significant debt.
Congressional Republicans could again utilize the Congressional Review Act to block new executive branch rules with legislation, as it did for the arbitration rule.
Beyond that, CFPB advocates are also concerned that Trump will soon have the power to hire a new director for the agency. The president reportedly wants to fire Cordray, but also does not want to make him a martyr, particularly since he is expected to step down before his term is up next summer and possibly make a run for governor of Ohio.
The U of M’s Cox does not expect Trump’s selection to uphold the bureau’s founding mission. “He has filled his Cabinet with Wall Street people,” he said. “If you want to boil it down, it looks like we’re headed to a pre-financial crash regulatory system.”
Despite vowing to fight back, Ellison conceded there is only so much Democrats can do to stop the campaign against the CFPB so long as they remain in the minority.
“Look,” he said, “what I’m saying is, we’re going to lose some of these, man. But we can never be found knuckling under.”