Senate Overturns CFPB Ban on Prohibiting Class Action Lawsuits Against Banks

The CFPB ban would have lessened the exploitation of the general public by the big banks, and since that represented a threat to the big banks’ profits, they used their power to have this ban repealed quickly.

The measure overturns the so-called arbitration rule, which would have banned banks, credit-card companies and other financial firms from requiring customers to settle disagreements through arbitration rather than in the courts. The mandate often appears as a fine-print clause in customer agreements.

Another article notes that despite majority support for the ban on prohibiting class action lawsuits against financial corporations, the rule was still overturned.

“The bill was entirely and exclusively supported by the [finance] industry,” said F. Paul Bland, an attorney at Public Justice, a consumer group. “Every group that represents consumers was strongly against the bill.”

Bland listed special interest groups that opposed the bill: armed service member groups, senior citizen groups, civil rights groups. “Lots of polling said both Republicans and Democrats oppose the bill by heavy margins,” said Bland. “This was the Wells Fargo immunity act. It’s essentially a bailout for those companies.”

For Wells Fargo, Equifax, and other companies that behave badly on a major scale, preventing consumers from banding together to seek justice is a major boon that could save these companies from an unknowable amount of damages.

From a report out months ago:

While the average consumer who wins a claim in arbitration recovers $5,389, this is not even close to a typical consumer outcome. Why? Consumers obtain relief regarding their claims in only 9 percent of disputes. On the other hand, when companies make claims or counterclaims, arbitrators grant them relief 93 percent of the time—meaning they order the consumer to pay. If you consider both sides of this equation, in arbitration, the average consumer is ordered to pay $7,725 to the bank or lender. That’s right: the average consumer ends up paying financial institutions in arbitration.

But let’s consider the consumers who do win in arbitration. How do those numbers stack up against class action lawsuits? In an average year:

  • At least 6,800,000 consumers get cash relief in class actions—compared with just 16 consumers who receive cash relief in arbitration, according to available data.
  • Consumers recover at least $440,000,000 in class actions, after deducting all attorneys’ fees and court costs—compared with a total of $86,216 in arbitration.

Banning consumer class actions lets financial institutions keep hundreds of millions of dollars that would otherwise go back to harmed consumers every year.

CFPB Trying to Stop the Debt Trap

This is an example of intervention by government power that’s actually trying to help downtrodden people. The role of consumer debt in society is often to weaken people and make it more difficult for them to fight against the corrupt people at the top with power.

The U.S. should use its post offices to provide basic banking services to communities to diminish the role of horrible payday lenders. The government should also cap consumer interest rates at 15 percent, as credit unions did in the early 1980s. Usury would have a much smaller role in a healthier society.

Today, the Consumer Financial Protection Bureau (CFPB) took the first step toward ending the debt trap by finalizing new consumer protections for shorter-term loans where consumers must repay all or most of the debt at once including payday and auto title loans, and longer-term loans with balloon payments.

The Debt Trap Harms Consumers

Payday loans, which often carry an annual interest rate of over 300%, are unaffordable and ultimately trap consumers in a cycle of debt where consumers roll over loans because they are unable to repay them. Lenders make money even if the loan is never successfully paid back because of high interest rates and fees—the debt trap. Financially vulnerable communities and communities of color are particularly harmed. Almost 70% of borrowers take out a second loan within a month, and one in five borrowers take out 10 loans or more consecutively. These borrowers taking out more than 10 loans a year are stuck in the debt trap and generated 75% of the payday loan fees in the CFPB’s research.

Auto title loans feature many of the same problems as payday loans and the CFPB found that 1 in 5 short term title loans ended up with borrowers losing their vehicle for failure to repay.

The New Rule is a First Step to Addressing the Harms of the Debt Trap

The CFPB’s new rule addresses some of the worst excesses of these loans, in states that allow them, by requiring lenders to establish a borrower’s ability to repay the loan before making the loan.

“The rule is an important first step and will benefit some consumers who need relief the most, but a great deal of work is still needed to ensure that American families are no longer ensnared in the debt trap of high interest, abusive loans,” noted Michael Best, Director of Advocacy Outreach at Consumer Federation of America.

Consumers will be pleased to see the rule as, in a recent poll, 73% of respondents supported requiring lenders to check a borrower’s ability to pay before making a loan.