Consumer ruling takes on Wall Street

Richard Cordray, the director of the Consumer Financial Protection Bureau, on Monday lobbed a golden apple of discord into the middle of Wall Street. Like the bauble that famously started the Trojan War, the final version of a rule issued by Cordray’s agency — which prohibits financial institutions from using arbitration clauses to shield themselves from class-action lawsuits — immediately caused an uproar. How Congress and the Trump administration respond to the bureau’s rule will reveal a great deal about where real power lies in this country.

As the use of compelled arbitration has proliferated in recent years, so have concerns about its fairness. Arbitration clauses force consumers who have complaints about a company out of the public courtroom and into private tribunals. The clauses also generally prohibit consumers from banding together to bring their claims.

That means, in almost all cases, that those claims won’t be brought at all. As U.S. Court of Appeals Judge Richard Posner put it, with respect to the small dollar amounts typically at stake in a class action, “The realistic alternative to a class action is not 17 million individual suits,” as argued by the industry, “but zero individual suits, as only a lunatic or a fanatic sues for $30.”

The content of the bureau’s rule comes as little surprise. The Trump administration has tried to undo prior efforts to limit arbitration, but the bureau is an independent agency, and its director was appointed by President Barack Obama. When Congress passed the Dodd-Frank Act in 2010, it instructed the bureau to examine the use of the clauses in consumer contracts. The bureau completed that study in 2015, finding that very few consumers make use of individual arbitration.

In other words, allowing the continued widespread use of arbitration provisions and class-action bans would make it very unlikely that consumers who are wronged by illegal or deceitful business practices will get any relief. The other reasons that arbitration harms consumers — its secrecy, its lack of accountability, its bias toward the repeat players who fund arbitration firms — also argued strongly against it. And so the bureau issued a rule requiring that financial contracts not contain class-action bans, that any individual arbitrations be subject to procedural safeguards, and that the results of individual arbitrations be reported to the agency.

What is surprising is that the bureau chose to issue the rule at all.

Congress has already acted 14 times under the Congressional Review Act to reverse rules issued by the Obama administration. And the next director of the bureau, scheduled to be named in 2018, will presumably be friendly to arbitration clauses, which are overwhelmingly favored by Wall Street. And the financial lobby is just about the most powerful political force in this country.

So why did Director Cordray do it?

Maybe he believes that the American people know a sharp practice when they see one, and that they won’t stand for the undoing of a rule that so obviously protects them.

Maybe he thinks that Congress will ultimately decide that forcing people into the shadows to resolve their disputes undermines the open and public system of justice on which this society was founded.

Maybe he is convinced that any future director will agree that Americans should not be compelled to sign away their constitutional rights every time they want to open a bank account or get a car loan.

Or maybe there is a simpler reason.

Maybe Cordray did it because it was the right thing to do.

Ted Mermin teaches consumer protection law at the UC Berkeley School of Law.