In the final hours of Tuesday night, the Senate voted to nullify a rule that would’ve allowed customers of banks, credit-card companies, and other financial institutions to join together in class-action lawsuits if they felt they’d been wronged. The rule—which was introduced in July by the Consumer Financial Protection Bureau (CFPB), but was not yet in effect—would have prevented financial institutions from forcing customers with legal grievances to resolve them out of court with the company’s lawyers, in a process called arbitration.
After a split decision in the Senate, the deciding vote on Tuesday night was cast by Vice President Mike Pence. All Republican Senators, save for Lindsey Graham and John Kennedy, voted for the repeal.
In the past, representatives of and lobbyists for the financial industry have argued that arbitration is better for both companies and consumers, because class-action lawsuits can be time-consuming and expensive. Their argument is that as companies fight off big lawsuits, the resources they’d need to do that could increase costs for customers in the long run.
But research from the CFPB found evidence that arbitration—which is often mandated by clauses buried in the fine print of customer agreements—can be cumbersome and costly for consumers. In a statement following the release of the rule this summer, Richard Cordray, the director of the CFPB, said that such clauses “allow companies to avoid accountability by blocking group lawsuits and forcing people to go it alone or give up.”
Other federal leaders were not in agreement, and their opposition to the rule has renewed concerns that consumers won’t fare well when powerful members of the financial industry are appointed to the government agencies tasked with overseeing their former employers. Prior to Tuesday’s vote, the Treasury Department, headed by the former Goldman Sachs banker Steve Mnuchin, released a report criticizing the rule and saying that it would result in “extraordinary costs,” in part from an additional 3,000 class-action lawsuits over the next five years and an additional $500 million in legal defense fees, the report finds.
Similarly, the Office of the Comptroller of the Currency, currently led by the one-time Wells Fargo defense attorney Keith Noreika, was critical of the rule, arguing that it would benefit trial lawyers and lead financial institutions to increase the interest rates on credit that they issue for things like loans or credit cards. “Because regulations have real consequences, it is essential that regulators listen to, and carefully consider, those being affected by their regulations,” Noreika said.
The Senate’s nullification of the rule came about even as recent major financial-industry scandals have harmed consumers. Both Wells Fargo, with its fake-account and auto-lending scandals, and Equifax, with its failure to protect the personal data of an enormous number of Americans, have utilized mandatory-arbitration clauses in some of the agreements they have customers sign. The nullification of the CFPB’s rule means that people who suffered financial harm or identity theft as a result of either of these large companies’ lapses may not have the right to take them to court.
In a statement following the repeal on Tuesday, Cordray called the vote “a giant setback for every consumer in this country.” He added that “Wall Street won and ordinary people lost.” Cordray has called on the president to veto the resolution, but seeing as the vice president cast the deciding vote, that’s unlikely to happen.
How does the push to end the CFPB’s rule fit into President Trump’s agenda? On one hand, it clearly goes against his campaign rhetoric about the lack of accountability on Wall Street. But, on the other, it’s right in line with Trump’s stated goals of rolling back regulations, particularly those put in place in the Obama era.
It also fits with Trump’s criticism of the CFPB, which he has said wields too much unchecked power. Ending the CFPB’s arbitration rule marks the most significant victory for Trump and congressional Republicans against the CFPB to date, and their success could set the stage for attempts at similar rollbacks in the future.