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Congress kills arbitration rule

Financial institutions can continue to block customers from banding together in class-action lawsuits, thanks to Congress’ decision to kill a pending arbitration regulation.

The Consumer Financial Protection Bureau’s (CFPB) “arbitration rule,” which would have barred companies from including forced-arbitration clauses in financial contracts such as credit card agreements and car loans, was slated to take effect in March 2018. The House passed a resolution repealing the regulation in July of 2017, followed by the Senate in late October. 

Republicans argued that the CFPB regulation primarily benefitted trial lawyers and could hurt Americans who would end up paying more for financial services.

Democrats and consumer-advocacy groups said the rule protected consumers and small business interests and gave them greater recourse when a company’s actions prove harmful.

Arbitration clauses are often buried in the fine print when consumers sign up for credit or financial services. Because the clauses have become relatively ubiquitous, consumers may have to choose between agreeing to arbitration or going without essential services.

Several lobbying groups, including the U.S. Chamber of Commerce and the American Bankers Association, had previously filed a federal lawsuit challenging the CFPB arbitration rule.  Among their arguments, they maintained that the rule failed to advance the consumer’s interest as required by the Dodd-Frank Act because it precludes the use of an arbitration mechanism in favor of class action litigation. The plaintiffs maintained that arbitration is better for consumers than courtrooms and class action lawsuits. In a related opinion piece published in Forbes, Republican senators Tom Cotton and Keith Rothfus suggested that the rule, if left standing, would place considerable pressure on the banking system, particularly on community banks, which would have to hold more funds in reserve against potential litigation rather than lending to small business and community members.

 

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