The directive will impact a variety of financial companies including those engaged in maintaining or converting funds for consumers or providing consumer lending, such as credit cards and automobile leases.
Elizabeth Warren strong supporter of CFPB class actions
Proponents such as U.S. Senator Elizabeth Warren (D-MA) are in favor of this CFPB measure. Of course, it makes perfect sense for liberals to support any action that would force financial companies to submit to class action lawsuits.
In 2010, Warren spearheaded the legislation that created the CFPB as an independent federal agency. It was supposed to protect consumers while preventing financial institutions from abuses that contributed to the Great Recession of 2008. The CFPB issues regulations and imposes fines on entities that do not strictly adhere to a large array of consumer finance laws.
Instead of helping consumers, the CFPB has forced banks to be more limited in awarding loans to qualified customers. According to U.S. Congressman Jeb Hensarling (R-TX), Chairman of the House Financial Services Committee, “one banker told me, ‘I'm just hunkering down in a foxhole and I'm not lending money because I am afraid of what the CFPB may do.’”
Instead of helping consumers, the CFPB has been on a mission to accumulate unchecked power. The agency receives funding from the Federal Reserve and is not answerable to either Congress or the President, who cannot fire the director.
Hensarling claims that the CFPB Director is an “unaccountable individual who essentially gets to determine what mortgages we have, what credit cards we have, bank loans we get. In a democracy, no one person should have that much power.”
It is no surprise that’s the CFPB has been ruled to be unconstitutional in federal court. While the case continues to move through the legal system, the CFPB has now unleashed their most controversial rule.
In effect, this change would be a huge windfall for trial lawyers and consumers would see little benefit. Arbitration is effective, relatively inexpensive and helps keep costs down for both financial companies and consumers. Decisions are usually legally binding and are rendered quickly compared with class action lawsuits. In the view of Ted Frank of the Competitive Enterprise Institute’s Center for Class Action Fairness, the CFPB decision would transfer “wealth from consumers to wealthy attorneys."
Trial attorneys often prefer class action lawsuits because they can earn not only legal fees, but also 33% or the total settlement. Unfortunately, our court system is slow, antiquated and clogged with too many cases. Plaintiffs hoping for quick, massive payouts are usually disappointed.
Financial companies taken to court will surely be forced to hire attorneys, but they will not pay the legal costs solely. Instead, they will recoup their expenses through higher consumer fees. While consumers may find relief with a relatively inexpensive arbitration option, going to court takes longer, leads to additional fees being imposed and could ultimately cost them more.
Unfortunately, the CFPB, “disregarded vast data showing that arbitration more often compensates consumers for damages faster and grants them larger awards than do class action lawsuits,” said John Berlau, Senior Fellow at the Competitive Institute.
This clear dereliction of duty motivated the House of Representatives to act quickly. On July 25, by a vote of 231-190, the House repealed the CFPB rule using its authority under the Congressional Review Act, which allows Congress to rescind new regulations within 60 days of being promulgated.
At that point, the repeal effort moved to the U.S. Senate, where it is currently stalled. This is no surprise as the U.S. Senate is closely divided and has been the graveyard of much good legislation.
The repeal has the support of the major banks and business groups, including the U.S. Chamber of Commerce. It is also supported by the Trump administration, which indicated the President would enthusiastically sign the repeal. Unfortunately, there are four Republican Senators undecided on the issue, including conservative U.S. Senator John Kennedy (R-LA).
Time for Senator John Kennedy, Senate Republicans to support CFPB rule repeal
If Senate Republicans do not act, the rule will go into effect September 18. Now is the time for Senator Kennedy and the other undecided Senate Republicans to support their colleagues and President Trump, as well as the interests of consumers.
Recently, the Senator commented that he is rightly doing his “homework” on the issue; however, it must be noted that few initiatives that are strongly supported by liberal Democrats have financial merit. While Democrats claim they want to “hold big banks accountable,” they have no interest in holding the CFPB accountable. Despite their rhetoric about benefiting consumers, their true goal is to benefit one of their favorite donor groups, trial attorneys.
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