Investor Alert

July 25, 2017, 11:04 p.m. EDT

House votes to prevent disgruntled customers from being able to sue their bank

A group of senators is trying to undo a rule that helps consumers bring class-action lawsuits against financial companies

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By Maria LaMagna

Alex Wong/Getty Images
Republicans have said the CFPB and Director Richard Cordray have too much power.

Should angry consumers be allowed to sue financial firms, when they think the companies have done them wrong?

No, according to members of the House of Representatives.

Earlier this month, the Consumer Financial Protection Bureau announced a final version of a rule that would ban companies from using language in their contracts called “mandatory arbitration clauses” that prohibit consumers from bringing class-action suits against them. The rule would apply to institutions that sell financial products including bank accounts and credit cards.

Members of the House on Tuesday voted to repeal the CFPB’s rule, which will now face a vote in Senate. “We applaud members of the House for taking a stand on behalf of consumers by voting to overturn the CFPB’s arbitration rule,” said Rob Nichols, the president and CEO of the trade group American Bankers Association, in a statement. “Today’s action is critical to ensuring the bureau doesn’t provide trial lawyers with a regulatory windfall at consumers’ expense.”

Many who have opposed the CFPB’s rules are Republicans: A group of Republican senators, led by Mike Crapo, a senator from Idaho who is the chairman of the U.S. Senate Committee on Banking, Housing and Urban Affairs, announced July 20 they would file a Congressional Review Act Joint Resolution of Disapproval in the Senate, in an attempt to overturn the rule.

That means members of Congress have 60 legislative working days to prepare for a simple majority vote. For the arbitration rule, those 60 days started July 19, when the rule was published in the Federal Register.

The CFPB itself has faced criticism from those who say it is too powerful, many of whom are Republicans.

“Members of the House took a much-needed step toward checking the power of a rogue agency and its attempt to impose a bad rule on American consumers,” said Lisa Rickard, the president of the U.S. Chamber Institute for Legal Reform and David Hirschman, the president and CEO of the U.S. Chamber Center for Capital Markets Competitiveness, in a joint statement after the vote. Both are part of the U.S. Chamber of Commerce.

The CFPB’s Cordray and other consumer advocates have argued that class-action suits are one of consumers’ only courses of action against companies, particularly when the arguments are over relatively small amounts of money.

A spokesman for the CFPB declined to comment about the Republican senators’ efforts to overturn the rule.

Currently, the clauses typically say that companies or customers must resolve disputes through privately appointed individuals known as arbitrators, but not through the court system, allowing companies to save time and money and avoid negative publicity.

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“Our new rule will stop companies from sidestepping the courts and ensure that people who are harmed together can take action together,” said CFPB Director Richard Cordray.

Cordray and other consumer advocates have argued that class-action suits are one of consumers’ only courses of action against companies, particularly when the arguments are over relatively small amounts of money.

Only about 2% of consumers with credit cards the CFPB surveyed during its research said they would consult an attorney or consider formal legal action to resolve a small-dollar dispute. Separately, 89% of consumers said they wanted the right to participate in class-action suits against their banks, when the Philadelphia-based nonprofit Pew Charitable Trusts surveyed about 1,000 consumers in 2016.

What’s more, many consumers aren’t aware they may have entered into contracts that have mandatory arbitration clauses in them. Some 75% of consumers don’t know whether or not their credit card agreement contains an arbitration clause, Cordray said.

The rule “is an extraordinary victory, and it’s going to make a huge, concrete difference in the lives of millions of consumers,” said Lisa Gilbert, the vice president of legislative affairs at Public Citizen, a nonprofit based in Washington, D.C. that has advocated for this type of rule that would protect consumers.

“By forcing consumers into secret arbitration, corporations have long enjoyed an advantage in the process, and victims have often been precluded from sharing their stories with the press or law enforcement,” said Vanita Gupta, the president and CEO of the Leadership Conference on Civil and Human Rights , a group of advocacy organizations based in Washington, D.C.

Opponents have said the rule is unnecessary and will lead to expensive litigation.

But Lisa Gilbert, the vice president of legislative affairs at Public Citizen, a nonprofit based in Washington, D.C., said there have already been examples of times when mandatory arbitration clauses have hurt consumers, including the case of Charles Beard, a sergeant in the Army National Guard, who was unable to bring a lawsuit against an auto lender while he was on duty in Iraq . The lender repossessed his car, although federal law requires lenders to have court orders to seize the vehicle of active duty service members.

In the case of Wells Fargo, /zigman2/quotes/203790192/composite WFC -1.19%   she said, unwanted accounts opened in consumers’ names could have been uncovered sooner if consumers were able to file a class-action suit against the bank; because they were barred from suing the bank, it took longer, she said.

Consumers can also submit complaints to the CFPB about practices they believe are unfair, on the CFPB’s website .

This story was updated on July 25, 2017.

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Maria LaMagna covers personal finance for MarketWatch in New York.

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