Many ﬁnancial institutions have included clauses in their deposit and loan contracts they provide that if a customer has a grievance with the institution the consumer must submit that grievance to arbitration rather than bringing a lawsuit. The Consumer Financial Protection Bureau (CFPB) has issued a ruling that in consumer transactions an arbitration agreement does not preclude the consumer from either bringing or joining in a class action lawsuit. A class action law suit is one where a group of similarly aggrieved persons may join together in bringing a legal action against the alleged perpetuator.
Relative to the propriety of class action lawsuits, I can argue either side of the issue. On one hand, a class action law suit is the only viable way for a group of persons who have suﬀered relatively small damages to obtain redress. For example, pretend that you were a customer of Wells Fargo and were damaged in the amount of $100 because it opened deposit accounts and credit lines in your name that you did not authorize. Absent some type administrative ruling forcing Wells Fargo to reimburse you, you have no reasonable means of redress other than a class action lawsuit. Whether you demand arbitration or ﬁle an individual law suit, the cost of doing so is going to far outweigh anything that you might receive. Your only reasonable means of redress is to join with a large number of similarly situated persons in a class action lawsuit.
On the other hand, eager lawyers (like myself) salivate at the opportunity of bringing a class action lawsuit against a ﬁnancial institution. That is better than Christmas and a birthday rolled into one. First, the legal fees awarded by courts are unusually high. Second, you know that the odds that the ﬁnancial institution will settle the case are hugely in your favor. The cost to the ﬁnancial institution of just answering the discovery demands that I will make can be astronomical. In almost all cases, the ﬁnancial institution will quickly realize that the cost of defending the case is going to be much greater than any verdict that might be rendered against it and will be forced to settle. There are certainly some class action suits that are legitimate but there are also a great number that are driven by the greed of the litigator rather than the beneﬁt of the consumer.
In July, the House of Representatives passed a resolution under the Congressional Review Act rejecting the CFPB's regulation. The Senate, by a narrow margin, concurred and the resolution will now be sent to the President, who will undoubtedly sign it. When a regulation is rejected under the Congressional Review Act, it cannot go into eﬀect and no government agency may issue a similar regulation in the future without subsequent congressional action authorizing it. In other words, the CFPB arbitration rule is dead.
The most signiﬁcant action in the Senate's passage of the resolution is that 50 Republicans were able to agree on something adverse to the CFPB. The Dodd-Frank amendment legislation, which I have discussed in prior articles, has passed the House of Representatives and is now before the Senate. The arbitration vote may be a harbinger of the Senate's action on the Dodd-Frank reform. There appears to be growing consensus in Washington that the CFPB has far more authority and autonomy than was ever contemplated and that it needs to be reined in. Also, the administration has indicated that when Chairman Cordray's term is up he will not be reappointed.
The bickering in Washington continues unabated and the debate over who did what to whom is mindful of a circular ﬁring squad. Hopefully, someday those in the room will agree it is time to get something useful done, like passing the Dodd-Frank reform bill.