According to data collected by the CFPB, over 50% of credit loans have arbitration clauses and tens of millions of consumers are party to them, including 44% of insured bank deposits.
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“The proposed rule is a wolf in sheep’s clothing”, David Hirshmann, head of the Chamber’s Center for Capital Markets Competitiveness, said in a statement Wednesday.
Class action litigation, on the other hand, enables consumers to band together to litigate a complaint common to all of them.
The CFPB proposal is seeking comment on a proposal to prohibit companies from putting mandatory arbitration clauses in new contracts that prevent class action lawsuits. Plaintiffs can also be blocked from bringing a group claim via the arbitration process, leaving them to negotiate individually with the company regardless of how many people were impacted by an alleged wrongdoing.
In November, as a draft of the CFPB’s rule circulated, the American Action Network’s president, Mike Shields, told The New York Times that the bureau’s position on arbitration “is a ideal example of how government is taking away the power of individuals and handing it to the trial lawyers”.
However, financial businesses and groups have criticized the proposal, saying it would result in increased legal liabilities for companies and little benefit for consumers.
The proposed rule flows from the CFPB’s March 2015 study which asserted that few consumers bring actions against financial services companies and claimed that few understood how arbitration clauses worked. “This rule will restore an important tool to consumers who have been harmed”.
The CFPB’s proposal does have a significant limitation.
For years, fine print buried in thick contracts has prevented consumers from pursuing rightful legal remedies when they have been harmed by tricks and traps in financial products. So-called forced arbitration clauses found across a range of financial contracts require consumers to agree to settle any disputes through private arbitration rather than going to court. They would also have to give the bureau information on claims filed and awards issued in the arbitrations, as well as correspondence from arbitrators regarding unpaid fees and failure to follow standards of conduct.
“Arbitration has long provided a faster, better, and more cost-effective means of addressing consumer disputes than litigation or class action lawsuits”, said Richard Hunt, president of the Consumer Banker Association, whose membership is mostly large regional and national retail banks. Norton says some consumers measured them and thought they were only 11 1/2 inches. House Financial Services Committee Chairman Jeb Hensarling (R-Texas) called it a “big, wet kiss to trial attorneys”.
“Companies, in general, believe they have an advantage over consumers in court”, Alan Kaplinsky, a partner at the law firm Ballard Spahr, told the Los Angeles Times.
A day in court for consumers: The proposed rules would allow groups of consumers to obtain relief when companies skirt the law.
Congress directed the CFPB to study the issue of mandatory arbitration under the Dodd-Frank financial regulatory law and decide whether arbitration needed to be regulated. In contrast, consumers who prevailed in arbitration agreements, on average, received $5,389.
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“The CFPB’s proposed rule will begin to reopen the courthouse doors to consumers who have been wronged by dishonest and abusive financial service practices”.
