“Consumers should not be asked to sign away their legal rights when they open a bank account or credit card”, said CFPB Director Richard Cordray.
Advertisement
However, consumer advocates say that arbitration unfairly limits customers’ options and potential financial recovery.
“Forcing consumers to hire expensive lawyers and go to trial rather than use a low-cost dispute resolution system harms the very low and middle income consumers the CFPB should be helping”, said Rep. Jeb Hensarling, R-Texas, who is chairman of the House Financial Services Committee. Further tipping the scale in favor of companies is the fact that financial institutions are the ones who pick the arbitrator, often a private firm contracted to handle the dispute. “The CFPB’s proposals under consideration would give consumers their day in court and deter companies from wrongdoing”.
The CFPB contends these clauses also typically bar consumers from bringing group claims through the arbitration process.
In a first step toward potential new rules, the CFPB is publishing an outline of proposals under consideration in preparation for forming a small business review panel to gather feedback from industry stakeholders. Unlike court filings, arbitration claims are not on the public record, and the CFPB said it might also choose to publish online the information companies submitted in order to increase transparency.
While it is taking aim at barriers to group lawsuits, the CFPB is not considering outlawing all arbitration clauses, the outline states. “Companies are using the arbitration clause as a free pass to sidestep the courts and avoid accountability for wrongdoing”.
Most consumers probably aren’t aware that they’ve signed away their right to join class actions against their bank or credit card company.
In March, the CFPB released its arbitration clause study which found that few consumers actually seek individual relief through arbitrations even though millions are eligible for group settlements. Where such a clause exists, either side can generally block lawsuits from proceeding in court.
“One way to think about the effect of enforced pre-dispute arbitration clauses is to recall what Sherlock Holmes described as ‘the curious incident of the dog in the night-time, ‘” Cordray added. Federal laws already ban arbitration clauses in mortgage contracts and in consumer credit contracts for certain military service members and their families. With group lawsuits, consumers have opportunities to obtain relief they otherwise might not get. In the credit card market, card issuers representing more than half of all credit card debt have arbitration clauses – impacting as many as 80 million consumers. Only 7% of credit card consumers covered by clauses realized that their ability to sue in court was restricted, the CFPB said. “Group claims often are the only effective way consumers can pursue meaningful relief for harms that can add up to large amounts of money for financial providers”. To put one more nail in the coffin of traditional finance, it will become much easier for consumers to sue their credit card company in the near future.
Class action lawsuits are typically cheaper for consumers and – as Cordray mentioned in his Sherlock Holmes analogy – encourage more customers to actually move forward with a public court case against a company, Cabraser says. When companies can be called to account for their misconduct, public attention on the cases can affect or influence their individual business practices and the business practices of other companies more broadly. Financial companies will still be able to force individuals to settle disputes through arbitration, however those cases are less common.
A letter signed by the American Bankers Association, the U.S. Chamber of Commerce and other industry groups said the study had “significant defects”.
Advertisement
“When the bureau issues proposed regulations, the public is invited to submit written comments which will be carefully considered before final regulations are issued”, officials said.
