Now the nation’s top consumer financial regulator, the Consumer Financial Protection Bureau (CFPB), is announcing a proposal to ban arbitration clauses, which would affect the entire financial industry and the hundreds of millions of bank accounts, credit cards and mortgages that Americans use.
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Americans may soon be able to bring class action lawsuits against banks and other financial firms thanks to a new rule proposed by the Consumer Financial Protection Bureau. Many banks include mandatory arbitration clauses in their credit card and deposit account agreements in order to manage the unpredictable costs of class action lawsuits.
By and large, US bank customers have signed away their right to sue their bank in court, often without being aware of it, because of rules buried in the fine print. That means customers generally are required to take any disputes with a bank to a third-party mediator instead of going to court. But, in recent years, and especially after a Supreme Court decision in 2011, mandatory arbitration clauses have become widespread across all kinds of industries.
Norton worries that many lawyers won’t bring lawsuits to protect consumers but will sue to unfairly shake down companies to line their own pockets. “More likely, what they’re really trying to do is hide their widespread wrongdoing from the light of day”.
“Using financial services like credit cards and loans should not mean giving up basic legal rights”, said Martha McCluskey, a CPR scholar who helped write the paper. “Even fewer consumers know how they actually work”.
In a year-long investigation, Jessica Silver-Greenberg and otherTimes reporters undertook a detailed study of arbitration clauses that the financial industry keeps arguing are a boon for consumers.
Deterrent effect: The proposed rules would incentivize companies to comply with the law to avoid group lawsuits.
As part of its proposed regulation, the CFPB also plans to monitor the arbitration process to ensure it is fair to consumers.
“No matter how many consumers are injured by the same conduct, consumers must proceed to resolve their claims individually against the company”, the CFPB said in explaining its reasoning for the new rules.
One wrinkle, though: The rule would require arbitrators to disclose information about the outcomes of the cases they decide. The proposed rule, if adopted, would go into effect next year.
“What made arbitration clauses attractive was their impact on class-action litigation”, he said. More than half of credit card companies include such a clause in their agreement, but three out of four consumers had no idea they had agreed to it, according to the CFPB.
There will be a public comment period for 90 days before the CFPB can issue a final rule. “The real winners of today’s proposal are trial attorneys, not consumers”.
The CFPB said that the proposal would impose increased compliance costs “including the costs of forgoing potentially profitable (but also potentially illegal) business practices that may increase class action exposure, and in the increased costs to litigation class actions themselves, including, in some cases, providing relief to a class”.
Calling such practices “egregious wrongs”, Robert Weissman, president of Public Citizen, said that “the proposed rule will end the worst elements of forced arbitration by restoring consumers’ right to once again band together over shared wrongs”.
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But the Bureau hopes to change that, partly by drawing attention to the prevalence of arbitration agreements, which require consumers to settle disputes through often highly secretive arbitration panels.
