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Bank Regulations are Being Rolled Back, How Will It Impact You?

Have you ever been abused by a major bank? It’s happened to many people. Sometimes, Wells Fargo opens an account you never authorized and charges you fees for it. Other times, Bank of America promises an underwater homeowner it will negotiate with them, only to foreclose on the homeowner behind his back. After the collapse of the housing market in 2007, the new Obama administration introduced a series of regulations to keep banks from engaging in such underhanded practices again. Those regulations are now being reversed.

What Happened?

Last Tuesday night, Congress and Vice President Mike Pence voted to overturn a rule limiting arbitration clauses in contracts between banks and consumers. The 45th President is expected to sign it. Congress has the power to review and overturn any rules made by the Consumer Financial Protection Bureau within 60 days of the Bureau’s creation of a new rule. The Treasury Department recommended overturning the CFPB rule because it would generate 3,000 in class action suits over the next five years, requiring those banks to spend up to $500 million in legal defense. The Treasury Department warned these suits would result in windfalls for plaintiff’s attorneys, but “zero relief” for the consumers who bring these suits.

regulationsThe CFPB’s rule banned the use of arbitration in contracts between banks and customers. Arbitration is favored by most industries because it is cheaper and less time-consuming than going to the court. However, arbitrators have often been accused of being biased, especially when the contract allows the business to decide who the arbitrator will be. Plaintiffs can hardly expect a fair hearing if the arbitrator was chosen by the business they were suing. Parties would not trust a judge handpicked by the very people they were suing, and yet it is somehow okay for this to occur in arbitration. Even worse, arbitration is often binding in these kinds of contracts – in other words, it is next to impossible to appeal a decision made by an arbitrator.

This is not to say that all arbitrations are like this. If two business partners agree to resolve their disputes through arbitration and they each agree on an arbitrator, arbitration would probably be fair and just in that case. However, when arbitration occurs because of an adhesion contract, such as those commonly found between banks and consumers, arbitration looks less like a cheaper option to trial and more like a kangaroo court.

Will This Even Work?

The CFPB’s proposed rule might have been imperfect, but at least it attempted to deter big banks from abusive practices. Although class actions might not be the best vehicle, at least they are a vehicle which consumers had. The CFPB’s report shows that consumers obtain 1,000 times more money from class action suits by plaintiff’s attorneys than through arbitration. Preventing consumer attorneys from representing classes of attorneys might protect banks from such lawsuits, but the individual consumers would be harmed even more if forced into arbitration.

This was evident in the mortgage crisis and recession ten years ago, when the major banks were caught forging documents and engaging in other shady practices to recover from losses in the housing industry. Repealing the CFPB’s rule looks even worse given that the Wells Fargo Account Scandal occurred only last yearand the Equifax scandal came out this summer. When it is obvious that the large banks and private financial institutions have not learned from the mistakes that triggered the worst recession since the Great Depression, repealing financial regulations now is not only foolhardy, but outright dangerous.

Jason Cheung

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