Customers use ATM machines at a Bank of America branch office, Friday, Oct 16, 2009 in Boston.
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“Consumers should not be asked to sign away their legal rights when they open a bank account or credit card”, said Consumer Financial Protection Director Richard Cordray when the propose changes were announced.
That will mean, he said, consumers have no option but to take banks to court if they believe they’ve been wronged.
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.
“Consumers will get less and pay more if the CFPB’s proposal to sideline arbitration and promote class actions is ultimately adopted”.
A while back, huge corporations figured out that nobody reads the contracts that you have to sign anyhow, so they might as well stick in clauses that say, in essence, “if you fuck me over I will not sue you in the courts, which could be bad for you-instead I agree to take our dispute to a private arbitrator, who is much more prone to favor corporations over consumers”. But in cases where arbitration is mandatory, “companies are able to use those clauses to block class actions”, the CFPB said.
Cordray will talk about the proposal at a hearing Thursday in Albuquerque, N.M., where advocates on both sides are expected to weigh in.
Many credit card and loan agreements these days have in the small type what’s called a “mandatory arbitration clause”. These clauses generally say that either the company or the consumer can demand that disputes be resolved either in arbitration or in small claims court.
A study commissioned by the CFPB in March 2015 showed that is very likely the case. However, when large numbers of customers were affected negatively by the same issue, the study showed arbitration clauses hinder the ability for customers to seek relief.
“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.
“In the 50 years since the advent of modern day class action lawsuits, plaintiffs’ lawyers have made millions of dollars in fees from these suits while consumers often receive little benefit”. Like other financial regulators, CFPB does not need congressional approval in order to pursue rulemaking.
The bureau’s proposal would not specifically ban arbitration clauses, which have become common in consumer contracts.
Following the study, the CFPB announced an outline of its proposal in October but had not laid out the exact details of what it planned to do.
Following a 90-day comment period, the bureau will then draft a final version of the rule, which must be reviewed by the Office of Management and Budget before it can go into effect.
Contracts that prevent consumers from filing class-action lawsuits against banks could soon be illegal under new rules to be proposed Thursday by the Consumer Financial Protection Bureau.
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The financial industry, under the potential threat of billions of dollars in lawsuits, is expected to fight the CFPB’s proposal hard. 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.
