The rule would prevent companies from placing a mandatory-arbitration clause – which many banks and credit-card companies now use – in new contracts to prevent consumers from filing class-action lawsuits.
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But finance industry representatives sharply criticized the new rule, which would give consumers an option for redress besides the arbitration clauses commonly found in banks’ fine print. They said that would lead to frivolous lawsuits and warned the bureau should expect a legal challenge.
But buried in many contracts for consumer financial products like credit cards and bank accounts, most arbitration clauses deny consumers the right to participate in group lawsuits against companies. Clauses would have to explicitly state that consumers can not be stopped from taking part in a class-action lawsuit.
An earlier CFPB study found that such clauses were found in almost every prepaid card contract, as well as roughly half of all credit card contracts, and almost half of all bank accounts were subject to it. The overwhelming majority of payday and student loans also impose this requirement on borrowers.
“Signing up for a credit card or opening a bank account can often mean signing away your right to take the company to court if things go wrong”, said Richard Cordray, CFPB director. Financial companies will still be able to force individuals to settle disputes through arbitration; however cases where a lone customer wants to sue his or her bank are far less common.
“The proposed rule…is an enormous step forward toward restoring the right to band together with others who have been harmed to redress grievances through the courts”, said Nan Aron, president of the Alliance for Justice, an organization of roughly 100 politically liberal advocacy and consumer groups. But the bureau says that the possibility of class-action suits will deter unfair practices by financial institutions that affect many customers.
It would also increase transparency by enabling the CFPB to collect any claims and awards that result from arbitration clauses and related correspondence. “These clauses also typically bar consumers from bringing group claims through the arbitration process”, the agency said of the rule. The long-awaited plan was expected by the industry following years of study by the bureau, which is giving stakeholders 90 days to comment on the proposal.
The private sector and conservative political leaders quickly criticized the proposal, saying it only helps attorneys who file class actions and reap fees and shares of settlements. “The agency created to protect consumers is proposing a rule that will end up hurting them”.
The industry reaction was swift, with Wall Street and its advocates warning of unintended consequences of the rule within hours of the CFPB proposing it on Thursday. Says Lisa Rickard and David Hirshmann of the U.S. Chamber of Commerce, in a prepared statement.
Such consumers could potentially file small claims court claims, which can cost considerably less, however.
The rule marks one of the more significant actions taken by the consumer watchdog since it was chartered by the Dodd-Frank reform law in 2010.
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But mandatory-arbitration clauses “block consumers from ever securing any meaningful relief from violations of the law”, Cordray said. The US Congress already prohibited arbitration agreements in the residential mortgage market, according to the bureau.
