Federal regulator moves to mostly ban arbitration clauses

Consumers could band together to sue their banks or credit card companies under a federal rule issued Monday that's likely to face resistance from Congressional Republicans and the White House.

The Consumer Financial Protection Bureau decided to ban most types of mandatory arbitration clauses, which require credit card or bank customers to use a mediator when they have a dispute — often giving up their right to sue in court.

Mandatory arbitration clauses are found in the fine print of tens of millions of financial products, from credit cards to checking accounts. Because consumers generally don't carefully read the fine print on the agreements for their checking accounts and credit cards, they are often unaware they are subject to arbitration.

Those clauses are not symbolic. They are used heavily by banks. Even Wells Fargo banned customers from filing class-action lawsuits against it during the height of its sales practices problems, until pressure from politicians and outside groups led the bank to waive that right earlier this year.

Consumer advocates have been pushing for years for stricter federal regulation of these types of clauses. The clauses, said Richard Cordray, director of the Consumer Financial Protection Bureau, are a way for banks and other financial companies to "sidestep the legal system."

"The rule will help to combat the culture of companies profiting from charging illegal fees and committing other crimes against their customers," said Rohit Chopra, senior fellow at the Consumer Federation of America, an umbrella group for dozens of consumer advocacy organizations.

Banks have strongly opposed banning arbitration causes, arguing that arbitration is a more efficient way of handling small disputes and that class-action lawsuits largely benefit the lawyers handling the cases. But there's also a bottom line impact: banks could be exposed to billions of dollars in lawsuits from customers. In a hypothetical example, a consumer wanting to dispute a $35 overdraft charge is not likely to hire a lawyer to sue his or her bank. However, a group of consumers who were all individually impacted by the $35 charge are more likely to dispute it collectively.

"We are not happy, but it's not surprising," said Richard Hunt, president of the Consumer Bankers Association, the trade and lobbying group that represents large retail banks like Bank of America, Wells Fargo, JPMorgan Chase and others.

Other industry groups echoed Hunt's comments, calling the new rules overreaching and called for Congress to step in.

The CFPB has long had its eye on arbitration clauses in financial contracts. The agency put forth a rough draft of its ban last year, and issued a study in 2015 looking at arbitration clauses in the industry. The 2010 Dodd-Frank Act, which created the CFPB, mandated that the agency look at arbitration clauses and, if warranted, issue regulations to restrain them.

The CFPB's rules are not a total ban on arbitration clauses. Financial companies will still be able to force individuals to settle disputes through arbitration, but those kinds of cases are far less common than class-action cases. The ban also won't apply to any existing contracts. So if a customer has a credit card with American Express, for example, that arbitration clause remains in effect. However if the person were to open a new credit card account with American Express after this rule went into effect, it would apply.

But the move by the CFPB — a high-profile independent agency created under President Obama — is likely to face pushback from the banking industry and the Republican-controlled Congress, which sees the CFPB as an agency with too much power and too little oversight.

Congressional Republicans have been using a '90s-era law known as the Congressional Review Act to roll back regulations issued in the final months of Obama's administration. The law allows Congress, with a simple majority vote that does not require the 60-vote filibuster threshold in the Senate, to override an agency's recently issued rules within 60 legislative days of it being finalized.

"The rule should be thoroughly rejected by Congress," said Republican Congressman Jeb Hensarling of Texas, the CFPB's biggest foe in Congress and chairman of the House Financial Services Committee. The White House declined to comment on the CFPB's announcement.

Cordray had acknowledged that the rule is likely to face scrutiny from Congress. However, Congress has passed laws that ban arbitration clauses outright in other forms of financial products, notably mortgages and loans to servicemen and women.

"I am, of course, aware of those parties who have indicated they will seek to have the Congress nullify this new rule," Cordray said in prepared remarks. "My obligation as the director of the Consumer Bureau is to act for the protection of consumers and in the public interest. In deciding to issue this rule, that is what I believe I have done."

Republicans have also challenged the structure of the CFPB, believing Cordray has too much power to act on his own. A measure that passed the House of Representatives earlier this year, which is being debated in the Senate, would change the CFPB into a multi-member commission and would greatly restrain its ability to regulate financial products.

If Republicans move forward with repealing the rule, Democrats would likely use the populist issue as a cudgel heading into the 2018 elections.


AP reporters Marcy Gordon and Josh Boak contributed to this report from Washington, D.C.


Ken Sweet covers banks and consumer financial issues for The Associated Press. Follow him on Twitter at @kensweet.