The Dangerous Consequences of Repealing the CFPB’s Arbitration Rule

Last week, President Donald Trump signed a congressional resolution repealing the Consumer Financial Protection Bureau’s (CFPB) arbitration rule. This rule, which the CFPB published after six years of agency proceedings, prohibited banks and credit card companies from using fine-print arbitration clauses to block class action lawsuits. But at the end of October, the U.S. Senate voted 51-50 to repeal the rule, following an earlier repeal vote in the U.S. House of Representatives. For consumers, the repeal of the CFPB arbitration rule marks the arrival of a new era of financial regulation defined by weaker protections against corporate fraud.

The main effect of the repeal is to free banks to use arbitration clauses as a shield against class action lawsuits. Class actions create powerful financial incentives for private attorneys to identify unlawful practices that harm many consumers and then bring lawsuits to remedy them. With class actions off the table, customers cannot count on these attorneys to police banks’ conduct on their behalf.

Banks say that class actions serve no real regulatory purpose, but there is evidence that at least some of these lawsuits do. A series of class actions filed in 2010, for example, shed a light on the practice of reordering checking-account transactions before they were posted to customers’ accounts. By reordering the transactions a customer performed on a given day from largest to smallest before posting them, banks were able to charge many times the overdraft fees that would have applied if the transactions had been posted in chronological order.

The practice disproportionately affected customers at the edge of insolvency who were unlikely to bring individual lawsuits challenging it. But because the interests of affected customers could be represented in class actions, the banks eventually refunded nearly $1 billion in overdraft fees. And the suits appear to have had a lasting effect on bank behavior: 91 percent of banks have limited or completely abandoned transaction reordering—a dramatic change from prior years.

With the CFPB rule gone, what can a consumer who suspects her bank has engaged in a similar fraud do? Private lawyers will be reluctant to take cases like the overdraft litigation because arbitration prevents them from joining together similar claims into an aggregate legal action that is worth the costs of litigating. Complaining to the bank might result in the bank refunding fees as a “courtesy,” but individual complaints are unlikely to change the way the bank does business. Switching to a small bank or credit union that does not mandate arbitration will not make a difference either, unless so many customers switch that it affects larger banks’ bottom lines.

Accordingly, consumers will have to turn to prosecutors, administrative agencies, and state attorneys general to address unlawful bank practices that affect many people. Those officials, however, have limited enforcement resources. And their decisions about which cases to pursue are influenced by political considerations that do not affect private attorneys. Those considerations, of course, can reinforce sound decision-making, such as when a prosecutor exercises discretion to decline to prosecute technical violations of the law or take other actions that would do more harm than good. But as recent events at the Manhattan District Attorney’s office illustrate, political calculations can also lead public officials to decline meritorious cases that involve allegations of serious harm.

The news for consumers is not all bad. Arbitration can be an attractive forum when a dispute concerns an isolated problem that does not affect other consumers. With the repeal of the CFPB rule, customers will continue to be able to arbitrate claims against banks. But the repeal also means that, for the most part, consumers will have to rely only on arbitration—and on imperfect, politically sensitive public officials—to police unlawful bank practices.

Decades ago, the U.S. Supreme Court described private lawyers who enforce regulatory laws as “private attorneys general” and the lawsuits they file as “a means of securing broad compliance with the law.” The repeal of the arbitration rule reflects Republicans’ judgment that the consumer financial sector is better off without this kind of regulation. Time will tell whether that judgment merely opened the door to a new era of corporate fraud.

David L. Noll is an associate professor at Rutgers Law School, where he teaches and writes in the fields of civil procedure, complex litigation, and public law.