Representatives of state banking associations have expressed their displeasure with a new rule from the Consumer Financial Protection Bureau that curtails the use of mandated arbitration.

Many consumer financial products like credit cards and bank accounts have arbitration clauses in their contracts that prevent consumers from filing class-action lawsuits and require the use of arbitration.

Mandatory arbitration clauses typically state that either the company or the consumer can require that disputes between them be resolved by privately appointed individuals (arbitrators) except for individual cases brought in small claims court.

While these clauses can block any lawsuit, companies almost exclusively use them to block group lawsuits, which are also known as “class action” lawsuits, a CFPB statement explains.

The Dodd-Frank Act required the CFPB to study the use of mandatory arbitration clauses in consumer financial markets. Congress also authorized the Bureau to issue regulations based on findings that are consistent with the Bureau’s study of arbitration. Released in March

The CFPB’s rule restores consumers’ right to file or join group lawsuits. Companies can still include arbitration clauses in their contracts, but may not use arbitration clauses to stop consumers from being part of a group action. The rule includes specific language that companies will need to use if they include an arbitration clause in a new contract.

In protest, representatives from banking associations in all 50 states (and Puerto Rico) wrote letters to Senate leadership urging tem to utilize the Congressional Review Act to keep the CFPB’s final arbitration rule from taking effect.

Under the CRA, Congress has the ability to reject new federal regulations within 60 legislative days of publication in the Federal Register.

To improve regulatory cost accountability, in 1996 Congress passed the CRA. It provides a 60-day period following agency publication of a regulation during which an expedited Senate or bicameral vote can halt implementation. If a rule is disapproved after going into effect, it is treated as though it had never taken effect.

“The undersigned state bankers associations representing banks of all sizes in every state strongly urge you to use your authority under the Congressional Review Act to prevent the economic damage to our communities that would result from the recently finalized CFPB ‘anti-arbitration rule,’” the letter says. “If allowed to take effect, the rule would create a windfall for unscrupulous class-action attorneys, provide little or no relief to harmed consumers, and effectively eliminate an accessible alternative to the often-daunting judicial system.”

“The fact is that the rigorous, independent, fact-finding process in arbitration provides a strong incentive for companies to satisfy aggrieved consumers quickly and informally,” the banking associations added. “Arbitration is used by the CFPB itself to address its own employee’s complaints against management. Most consumer disputes are unique and not “classable” and shutting down arbitration will leave this vast majority of consumers with only one option: the expense and frustration of courtroom litigation.”

In class-action lawsuits, “the spoils go overwhelmingly (and sometimes exclusively) to a small cadre of highly motivated trial lawyers who specialize in filing a large volume of often-frivolous and speculative litigation,” the authors wrote, adding that according to the CFPB’s own study, in nine out of 10 class actions, consumers received nothing, and in the remaining cases consumers receive an average of just $32.

Compare that to the $5,389-average award in arbitration decisions studied by the CFPB. “The CFPB chose to ignore this data and instead effectively eliminated arbitration without proposing a reasonable alternative process for timely, low-cost resolution of consumer disputes,” the letter says.

That attack echoes earlier statements by critics of the rule.

“The CFPB has gone rogue again, abusing its power in a particularly harmful way,” Sen. Tom Cotton (R-Ark.) said in a statement following the July 11 announcement of the rule. “The Bureau’s new rule on arbitration clauses ignores the consumer benefits of arbitration and treats [citizens] like helpless children, incapable of making business decisions in their own best interests.”

Cotton said he has “started the process of rescinding this rule using the Congressional Review Act.” legislators an opportunity to pass a resolution of disapproval to halt the regulation.

 “The last thing Americans need is more anti-business regulation that will prompt frivolous lawsuits while hurting consumers,” Cotton said.

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