Will Donald Trump say “you’re fired” to one of the few real populists in his administration?
In a summer not wracked by political disarray and global conflict, Washington might be focused on the billion-dollar battle brewing between the Consumer Financial Protection Bureau and the financial industry. Last month, CFPB director Richard Cordray, appointed by president Barack Obama, ruled that financial institutions could no longer use arbitration provisions in contracts to block their customers from filing class-action lawsuits.
Typically, when Americans sign up for a credit card or other financial product, they give up their right to bring their banker to court for breaking the contract, often without even realizing it. Instead, they sign fine print agreeing to settle any disputes in what is called “forced arbitration,” a legal procedure where independent attorneys, often hired by financial institutions, resolve disputes, rather than a public court. There are only limited avenues for appeal, and the process is entirely secret.
The CFPB’s new rules means companies will have to make their cases in public court. On July 30, one of Donald Trump’s top outside advisers, Corey Lewandowski, signaled the White House’s response. On Meet the Press, he suggested the first priority for new White House Chief of Staff John Kelly is to fire Cordray. (That will have to be his second priority, given Monday’s ouster of communications director Anthony Scaramucci.)
Lewandowski, a onetime manager of Trump’s 2016 campaign, set himself up as a Washington influence-peddler in the wake of the election, brokering deals between the White House and corporate interests. While he said on Sunday that his clients aren’t picking fights with the CFPB, there is a major push on behalf of the industry to overturn the rule. The House of Representatives voted to reverse the decision last week, and if the Senate concurs and Trump signs the bill, the change will be ultimately short-lived. (It’s not clear if Republicans have the votes to reject the rule, since only a handful of defectors would doom the reversal effort.)
A decision to terminate the rule would be yet another betrayal of the populist rhetoric that Trump embraced during his campaign.
The use of arbitration provisions has increased dramatically since 2000, thanks in part to consumer victories. Beginning in 2009, class-action lawsuits against banks for charging excessive and unfair overdraft fees led to more than a billion dollars in settlements, and banks began inserting arbitration clauses in their contracts more often. The practice was boosted by a 2011 Supreme Court decision, decided 5-4 to on party lines, that affirmed corporations could rely on arbitration provisions to block class-action suits; in this case, preventing AT&T customers from challenging a $600 fee for cancelling their service.
Consider the recent example of Wells Fargo, a bank embroiled in a scandal because it opened up new accounts for existing customers without telling them, in order to drive sales and fees. A series of judges blocked class-action suits brought once these practices were revealed, thanks to arbitration provisions. Pressure from politicians and the press ultimately forced the company to waive those provisions (and oust its CEO), and affected consumers eventually won more than $140 million in settlement payments.
Most of the time, however, national outrage doesn’t force companies to play fair. Consumer advocates say that the arbitration provisions stack the deck against consumers when financial companies take advantage of them. Families who lose a few thousand dollars or less need to invest significantly more than that to hire attorneys in an effort to recoup their losses, rather than sharing the costs with a class of similarly affected customers. One CFPB investigation found that, out of millions of accounts, just 1,233 consumers filed for arbitration in 2010 and 2011. Only 341 cases were resolved on the merits, with the rest ending in settlements; of the resolved cases, just 32 were decided in consumers’ favor.
That lack of accountability may breed more pernicious behavior. Lawsuits have recently revealed that Wells Fargo signed up more than 500,000 customers with auto loans for additional insurance coverage without their knowledge, and then billed them for it.
Financial companies argue that arbitration clauses actually benefit consumers, positing that banks pass along to their customers any savings from not having to engage in frivolous litigation. There is little empirical evidence for this claim, yet there is political weight behind it. The trial attorneys who bring class-action lawsuits are associated with the Democratic party, and affected companies are hoping to win Republican backing by painting the CFPB’s decision as politically motivated. That helps explain House Republicans’ overwhelming support for ending the rule.
But politics is also standing in the way of a reversal. Before being appointed head of the CFPB, Cordray was Ohio’s attorney general, and is reportedly considering returning to his home state to run for governor. While Lewandowski argues that firing him for his political ambitions make sense, a public confrontation over standing up for consumers against credit card companies would be a strong way to inaugurate such a campaign. Some in the Republican party brain trust are hoping to let Cordray exit the post of his own volition, or in 2018 when his term expires.
The White House’s decision on the future of Cordray, and the rule itself, could show how the Trump administration plans to operate without direct ties to the Republican party establishment. Will Trump seek to emphasize his populist differences with the GOP at large, as he did in 2016, or fall into his regular pattern of backing the financial powers that be?