Congress just killed a rule that would have made it easier for consumers to sue banks --  here's why people are so upset

Elizabeth WarrenJoe Raedle/Getty ImagesSen. Eliizabeth Warren
  • The Senate passed a bill Tuesday to kill a regulation from the Consumer Financial Protection Bureau.
  • The rule would have prevented financial institutions from including forced arbitration language in contracts for things like credit cards and car loans.
  • Democrats argued the rule protected consumers and gave them more legal recourse against big banks. Republicans argued lawsuits were not beneficial to consumers and could hurt small banks.

On Tuesday, Congress passed a bill preventing an Obama-era regulation from going into effect that would have made it easier for consumers to file class action lawsuits against financial firms, particularly banks.

The bill rescinded a rule from the Consumer Financial Protection Bureau that would strip language from certain financial agreements forcing consumers into arbitration instead of allowing people to sue.

Vice President Mike Pence cast the tiebreaking vote on the bill to strike down the CFPB’s rule since Republican Sens. Lindsey Graham and John Kennedy voted against the measure.

The bill was the culmination of a long fight between parties, with each side arguing that they were fighting for the best interest of consumers.

What was the rule?

The rule, released in July by the CFPB, prevented financial institutions from including clauses in contracts for financial products that forced consumers into arbitration in the event of dissatisfaction with the product.

While the rule did not do away with arbitration completely, it would have given consumers the option to settle disputes with lawsuits rather than entering arbitration.

Forced arbitration clauses are common in contracts for things like credit cards and car loans, and banks argue that it is a quick way to settle disputes with consumers without going through drawn-out legal cases.

Regulations such as the CFPB’s rule are subject to the Congressional Review Act, which allows Congress to void any rule with a majority vote. So nearly as soon as the regulation was released, the wheels to remove it began to turn.

Arguments for and against the bill

Democrats’ argument in favour of the CFPB rule was pretty simple — they said it allowed consumers to hold banks and financial institutions accountable. The CFPB said that class action lawsuits brought more money back to consumers who had been wronged and arbitration clauses let banks off the hook.

Additionally, Democrats argued the rule was in part about consumer freedom, giving them the option of going to court instead of being forced into arbitration.

“This rule helped ensure that consumers are not forced to forfeit their rights in settling disputes with big banks and other financial firms and served as a powerful tool for consumers to hold financial institutions accountable,” Democratic Sen. Maggie Hassan said in a statement following the vote.

On the other side, Republicans argued that class action lawsuits did not benefit consumers and could be harmful to businesses.

A Treasury report argued that plaintiffs in class action lawsuits were no better off than they were under forced arbitration. There was debate over the numbers in the Treasury report, but the GOP pointed to it as evidence that arbitration worked for consumers and argued that lawsuits are only beneficial to lawyers.

“Now, arbitration is a widely accepted method of resolving disputes between consumers and banks and other financial institutions,” said GOP Sen. John Cornyn on Tuesday. “And it actually increases the benefit that flows to the consumer, as opposed to the alternative, which is class action lawsuits, which enriches lawyers where consumers get pennies on the dollar.”

Additionally, Republicans argued the rule would leave smaller community banks open to harmful, frivolous lawsuits.

“Further, the rule would harm our community banks and credit unions by opening the door to frivolous lawsuits by special interest trial lawyers,” said a statement from the White House.

The politics of the bill

The issue became particularly heated after the recent Wells Fargo and Equifax scandals.

In Wells Fargo’s case, it emerged after the bank’s fake accounts scandal that the bank included language that forced consumers into arbitration. And Equifax was found to have created a website that pushed people toward arbitration rather than lawsuits following that company’s massive data breach.

Democrats used these two examples as evidence of why the rule was needed and decried the passage of the bill killing the rule. One particularly strong voice was Sen. Elizabeth Warren, who has been staunchly anti-Wall Street for years and advocated against the bill.

“The American people have watched as Wells Fargo cheated its customers and then used arbitration clauses to try and escape liability,” Warren said Tuesday. “They have watched as Equifax negligently allowed hackers to steal the personal financial information of more than half of all American adults, and then use arbitration clauses to try and escape accountability. Politicians have watched it too. And while many of their eyes might be blinded by dollar signs, it may not be enough.”

On the other side, Republicans have long been critical of the CFPB, particularly its director Richard Cordray. The animosity towards Cordray and the CFPB, along with the Treasury report, likely pushed on-the-fence GOP members toward supporting the bill.

While some Democrats and Cordray called on President Donald Trump to veto the bill, it is highly unlikely considering the administration applauded its passage in a statement released Tuesday.

“By repealing this rule, Congress is standing up for everyday consumers and community banks and credit unions, instead of the trial lawyers, who would have benefited the most from the CFPB’s uninformed and ineffective policy,” said the statement.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.