Cordray takes on Wall Street with consumer protection rule

San Francisco Chronicle – By Ted Mermin

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.

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