Senate kills new rule allowing class-action lawsuits against banks after Pence casts deciding vote

WASHINGTON – The Senate voted Tuesday night to kill a controversial rule that would have allowed Americans to file class-action suits against banks instead of being forced in many cases into private arbitration.

The move by the Senate followed a similar action by the House in July to rescind the rule. President Donald Trump is expected to sign the repeal legislation, providing a major victory for the financial industry. Vice President Mike Pence cast the deciding vote after the Senate tied 50-50.

The rule was unveiled in July by the Consumer Financial Protection Bureau and praised by Democrats and consumer advocates as giving average people more power to fight industry abuses, such as Wells Fargo & Co.’s creation of millions of unauthorized accounts.

But banking lobbyists argued that the rule would unleash a flood of class-action lawsuits, and the cost of fighting those suits would be passed on to consumers. Republicans quickly moved to repeal the regulation.

“The entire purpose of this rule is to promote class-action litigation and stop arbitration resolution when there is a dispute,” said Sen. Mike Crapo, R-Idaho.

Set to take effect in March, the rule would not have banned clauses in checking account, credit card and other banking agreements that say disputes between companies and customers must be dealt with privately rather than in court.

Instead, there would have been a ban on provisions that block consumers from banding together to bring class-action cases. The CFPB argued that such cases help hold banks accountable.

The determinations of an arbitrator are binding and consumer advocates say most decisions favor the company. The private proceedings also allow banks to deal with individual problems quietly rather than address widespread abuses.

For years, Wells Fargo used arbitration clauses to block lawsuits from customers who alleged that unauthorized accounts had been opened in their names. Ultimately, the bank estimated that up to 3.5 million such accounts were opened.

The bank agreed to settle some class-actions suits, but not until the CFPB, the Office of the Comptroller of the Currency and the Los Angeles city attorney’s office fined the bank over those practices last year. Even in cases that the bank settled, it had argued that the plaintiffs could not sue because of arbitration clauses.

Democrats cited the Wells Fargo case and the recent massive data breach at credit reporting company Equifax as proof that the new CFPB rule was needed to protect consumers from abuses.

Equifax has been criticized for initially making consumers give up their right to sue if they wanted to take advantage of the company’s offer of free credit monitoring and identity theft protection after the breach. Equifax later backtracked on that requirement after a public uproar.

“Our job is to look for the people whom we serve, not to look out for Wells Fargo, not to look out for Equifax, not to look out for Wall Street banks, not to look out for corporations who scam consumers,” said Sen. Sherrod Brown, D-Ohio.

The House voted 231 to 90 to repeal the rule using the Congressional Review Act, a formerly little-used mechanism that Republicans have employed under Trump to invalidate more than a dozen Obama administration regulations.

No House Democrats voted to repeal the rule.

The Review Act was put in place in 1996 to give Congress the expedited ability to repeal new rules put in place by federal regulators. Such a measure needs only a simple majority vote in the Senate, so opponents cannot block it with a filibuster.

The act had been used successfully just once before this year, because it usually is only relevant when the presidency shifts parties and a new administration wants to invalidate actions of a previous one.

Although Republicans controlled Congress the final two years of Obama’s presidency, his ability to veto repeal efforts short-circuited most of them.

Last year, congressional Republicans tried to repeal a consumer bureau rule for retirement advisers. The measure passed the House and Senate, but Obama vetoed it.

On Monday, the Treasury Department issued a report slamming the arbitration rule as flawed and a giveaway to class-action attorneys.

The 18-page analysis, which the Treasury Department said was based on consumer bureau data, concluded that the rule would “impose extraordinary costs” on businesses that likely would be passed on to consumers. Treasury estimated the rule would lead to more than 3,000 additional class-action lawsuits over the next five years.

“Treasury’s report shows that the CFPB is more interested in helping trial lawyers than consumers,” said Rep. Jeb Hensarling, R-Texas.

Democrats this week criticized the Treasury report on the arbitration rule as simply echoing industry arguments.

The consumer bureau had determined that the effect on the entire financial system would be less than $1 billion a year. Richard Cordray, the bureau’s director, has noted that U.S. banks earned a record $171 billion in profits in 2016.

Hensarling has been an outspoken critic of the rule and consumer protection bureau in general. The independent agency was created by the 2010 Dodd-Frank financial regulatory overhaul to oversee credit cards, mortgages and other financial products.

Nearly all Republicans opposed creation of the bureau and have pushed to reduce its authority over financial companies. They also have urged Trump to fire Cordray, a Democrat who was appointed by Obama to a term that does not expire until July 2018.

Republicans have complained that Cordray has been too heavy-handed as bureau director, putting in place rules they say have restricted consumer access to credit. In June, the House voted along party lines for a Hensarling bill to repeal many of the stricter Dodd-Frank regulations.

The bill, which the Senate has not yet considered, also would gut the consumer bureau. The director would be subject to removal by the president for any reason and the agency’s independent funding stream would be eliminated, making it subject to congressional appropriations that would allow Republicans to reduce its budget.