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BOSTON — A new federal rule that would stop banks and other companies from using fine print to block legal action against them by consumers is facing stiff resistance from the financial industry and GOP-controlled Congress.
The rule, issued last week by the Consumer Financial Protection Bureau, bans most types of mandatory arbitration clauses, which require credit card or bank customers to use a mediator if they have a dispute.
Attorney General Maura Healey, a Democrat who pushed for the rule with other attorneys general, said it “provides a valuable check against corporate misconduct.”
“Class-action claims are critical to ensuring that consumers are able to pursue their legal rights and deterring businesses from using unlawful, unfair or deceptive business practices,” she said.
Mandatory arbitration clauses are routinely added to contracts by financial institutions for credit cards, payday loans, checking accounts and other products.
Consumer advocates say the clauses often include language prohibiting legal challenges and restricting a consumer’s right to join a class-action lawsuit.
Deirdre Cummings, legislative affairs director for the Massachusetts Public Interest Research Group, said the practice is widespread in banking and affects anyone with a credit card or bank account.
“If consumers are prevented from filing class-action lawsuits, then companies aren’t going to worry if they tack on extra fees and charges to people’s bills,” she said.
Consumers usually don’t read the fine print and are often unaware of the rules, Cummings said.
In one of the more egregious examples, Wells Fargo customers were prevented from suing en masse over allegations that the bank fraudulently opened fake accounts in their names and charged excessive fees.
Banks that could be subjected to class-action lawsuits seeking billions of dollars oppose the move. They say arbitration is a more efficient way of dealing with minor disputes, and class-action suits mostly benefit the lawyers who litigate cases.
“Our primary concern is whether it will lead to more costly lawsuits,” said Jon Skarin, senior vice president at the Massachusetts Bankers Association. “Most of our members do a very good job of trying to resolve disputes before it gets to the point of litigation.”
The move could hurt smaller banks that would have to rewrite customer contracts under the rule, he said. Banks and financial service firms would have about eight months to remove mandatory arbitration language from those agreements.
“It’s a lot of work, particularly for community banks that don’t have a lot of staff and resources,” Skarin said. “All that will take time, and there’s a cost associated with it.”
“Overall, I’m not sure there’s going to be a lot of benefits for consumers,” he added.
The GOP-controlled Congress, which is targeting the Dodd-Frank Wall Street Reform and Consumer Protection Act that created the consumer bureau, wants to dilute the agency’s authority and subject it to White House and congressional oversight.
Sen. Tom Cotton, an Arkansas Republican, told reporters last week that he plans to begin the process of repealing the rule through the Congressional Review Act. The law allows Congress to strike down rules approved within a certain timeframe.
President Donald Trump, a Republican, has also taken aim at the bureau.
Earlier this week, his acting national banking regulator, Keith Noreika, urged the bureau’s director, Richard Cordray, to delay the rule. Noreika has outlined aggressive plans to ease financial rules.
“They should really call this the ‘class-action lawyer enrichment rule’ because that’s all that’s going to come from it,” said Darren McKinney, a spokesman for the American Tort Reform Association, a Washington, D.C.-based conservative group, about the bureau’s pending rule. “It’s an invitation to more class-action lawsuits, period.”
McKinney said Cordray’s decision to issue a rule that he knew would face widespread opposition was “purely political.” Cordray, a Democrat appointed by former President Barack Obama, is being groomed to run for Ohio governor in 2018, McKinney said.
“It’s political grandstanding, and ultimately this rule won’t survive,” he said.
Members of Massachusetts’ all-Democratic congressional delegation support the rule. They say they will do whatever they can to prevent Congress from lessening the protections.
“Big-business lobbyists will spend millions of dollars attacking this rule and trying to get their Republican friends in Congress to reverse it and shield them from accountability,” said Sen. Elizabeth Warren, D-Mass. “We have to fight back and defend this rule.”
Sen. Ed Markey, D-Mass., said the rule “ensures that individuals harmed by the same corporate misconduct, but who alone could not take on a big business, can band together to vindicate their rights.”
“For far too long, the playing field has been tilted against consumers and in favor of corporations,” he said in a statement. “No consumer should be denied a day in court as part of a class action that seeks to hold a company accountable for its wrongdoing.”
Christian M. Wade covers the Massachusetts Statehouse for North of Boston Media Group’s newspapers and websites. Email him at firstname.lastname@example.org
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