Finance Industry Sues CFPB to Overturn Rule on Bank Arbitration

(Bloomberg) -- A coalition of corporate lobbying groups, led by the U.S. Chamber of Commerce, sued the Consumer Financial Protection Bureau to overturn a rule that makes it easier for aggrieved customers to file lawsuits against financial firms.

The litigation, filed Friday in a federal court in Dallas, challenges the CFPB's controversial effort to curb forced arbitration. The plaintiffs include the chamber, the American Bankers Association, the Consumer Bankers Association, the Financial Services Roundtable, the American Financial Services Association and groups representing Texas businesses.

The groups filed the lawsuit as the fight over the CFPB's regulation comes to a head on Capitol Hill. While the agency argued that it gives consumers more power to hold firms accountable, some Republicans say the rule will mostly benefit trial lawyers and could result in Americans paying higher interest rates on credit cards and other financial products. GOP lawmakers are trying to overturn the regulation through legislation, though they have a limited time to do so and it's not clear they have enough votes in the Senate.

The CFPB rule, approved in July, targets arbitration clauses that are often buried in the fine print of contracts that consumers sign when they get new credit cards or open up checking accounts. The clauses prevent customers from banding together to file class-action lawsuits, instead requiring them to settle disputes through arbitration. The CFPB regulation requires companies to remove mandatory arbitration clauses from contracts by March.

Unconstitutional Structure

The lawsuit filed by the chamber and other groups argues that CFPB actions aren't valid because its structure, as created through the 2010 Dodd-Frank Act, is unconstitutional. They also challenged the research the CFPB used to write the arbitration rule, saying it's flawed and that the regulator ignored evidence that shows its regulation will harm consumers.

CFPB spokesman David Mayorga declined to comment on the lawsuit.

Banks and other financial firms have routinely argued that arbitration actually benefits consumers by making it faster and cheaper for the public to resolve complaints than litigation.

Earlier this week, Acting Comptroller of the Currency Keith Noreika, said the CFPB rule could boost credit-card interest rates by more than 25 percent, citing a report that relied on CFPB data. Noreika had previously threatened to try to hold up the rule.

No Accountability

Democrats and consumer-advocacy groups have been making an urgent push this week to stop Republicans from killing the CFPB's rule, using major scandals at Equifax Inc. and Wells Fargo & Co. to make their case. Senate Minority Leader Chuck Schumer said Wednesday that repealing the regulation is tantamount to giving Equifax and Wells Fargo a “get-out-of-jail free card” after the companies harmed consumers. Executives from both corporations are slated to appear before Congress next week.

The House passed its bill reversing the CFPB rule in July and they can only afford to lose two Republicans in the Senate for any legislation to pass. Senate Majority Leader Mitch McConnell has not scheduled a vote.

The GOP's effort has been complicated by the massive data breach at Equifax. When consumers signed up for Equifax's free credit monitoring earlier this month, they were required to sign a contract that would restrict their ability to sue the company. Equifax later amended its policy following backlash from customers and Democratic lawmakers.

To contact the reporter on this story: Elizabeth Dexheimer in Washington at edexheimer@bloomberg.net.

To contact the editors responsible for this story: Jesse Westbrook at jwestbrook1@bloomberg.net, Gregory Mott