WASHINGTON — The Senate voted 51 to 50 late Tuesday to repeal the Consumer Financial Protection Bureau’s rule banning mandatory arbitration clauses in financial contracts, ending months of fighting between the consumer agency on the one hand and the financial services industry and a few fellow regulators on the other.
The rule, which was released in July, would have prevented banks, credit unions and other lenders from requiring customers use the arbitration process to resolve disputes, stopping them from filing class-action lawsuits.
To overturn it, Senate Republicans used an obscure legislative process called the Congressional Review Act, which allows lawmakers to overturn a recently finalized rule by a majority vote. Even then, however, the vote was close.
Sen. Lindsey Graham, R-S.C., and Sen. John Kennedy, R-La., voted against the repeal effort, defecting from their GOP colleagues. With Democrats voting as a block against repeal, Republicans were forced to call in Vice President Mike Pence to cast the tie-breaking vote.
For a moment, it appeared the outcome would be in doubt. Sen. Lisa Murkowski, R-Ala., was the final lawmaker to vote, with several minutes ticking by as the Senate awaited her decision. Once she voted in favor of repeal, Pence stepped in to break the tie, approving the repeal measure 51 to 50.
The House passed similar legislation in July and with the Senate’s approval, the bill will now be sent to President Trump, who is expected to sign it into law.
The action does not just scrap this rule, but also prevents the CFPB from writing a “substantially similar” rule down the road without congressional action.
The vote late Tuesday caps a fractious fight between the CFPB and the industry in which it was unclear whether Republicans would be able to gather the necessary support in the Senate. It also marks the financial services industry's most significant legislative victory this year.
In a statement after the vote, CFPB Director Richard Cordray said the vote was "a giant setback for every consumer in this country."
"Wall Street won and ordinary people lost," Cordray said. "Companies like Wells Fargo and Equifax remain free to break the law without fear of legal blowback from their customers."
Financial companies and the powerful U.S. Chamber of Commerce both opposed the rule, joining Republicans who claimed that the new regulation would expose financial companies to costly class-action lawsuits that rarely deliver significant compensation for plaintiffs. They pointed to a CFPB study that found that consumers who went through a closed-door arbitration process received more than $5,000 on average opposed to $32 in class-action lawsuits.
"There is no reason for us to enrich a class of lawyers who … bring these lawsuits and see consumers getting pennies on the dollar, which is what the status quo would permit,” said Sen. John Cornyn, R-Texas, in floor debate on Tuesday. "So thankfully, we have the power of the Congressional Review Act to overturn the rule as the House has already done. I urge my colleagues to repeal the CFPB arbitration rules that imposes obvious costs and invisible benefits.”
Senate Banking Committee Chairman Mike Crapo, the Republican from Idaho who led the effort to repeal the CFPB rule, said the "issue here is that we force the resolution of disagreements or disputes in financial transactions into class-action litigation."
"The CFPB's own study said the clear majority of arbitration clauses ... specifically recognize and allow access to small claims court as an alternative to arbitration," he said.
The GOP opposition to the rule was supported by the Treasury Department, which released a report on Monday saying that the CFPB’s arbitration rule would “impose extraordinary cost,” imposing $500 million in additional legal fees that would largely go to plaintiffs’ lawyers. That followed another agency, the Office of the Comptroller of the Currency, which also claimed that the rule would raise legal costs for banks.
Democrats, on the other hand, say that class-action lawsuits were more effective at holding big businesses accountable and offer a viable path for restitution when it comes to smaller claims.
“Who's going to pay $200 upfront to try to get back a $30 fee back? No one,” said Sen. Elizabeth Warren, D-Mass., during a Senate floor speech before the vote. “That's exactly what the banks are counting on.”
Warren and other Democrats have also tied force arbitration agreements to the Wells Fargo phony-accounts scandal and the Equifax data breach. In both cases, the companies used arbitration agreements to try and protect themselves from liability despite operational breakdowns that hurt consumers.
"Forced arbitration hurts the 3.5 million people who had bank accounts fraudulently opened by Wells Fargo," said Sen. Sherrod Brown, D-Ohio, on the Senate floor during debate. "Forced arbitration hurts the 145 million Americans who had their personal data put at risk by Equifax."
During her speech, Warren pointed to the Wells scandal where employees were creating millions of fake accounts for customers in order to meet sales goals.
“If there's no forced arbitration clause in your contract, you have a choice. You can go to court or if your bank offers it you can pursue arbitration. ... Chances are pretty good that if the bank charged you an unauthorized $30 fee that there are other customers in the same boat and that means if you want you can join a class action lawsuit against the bank for free," Warren said. "A class action gives you a chance to get some money back."