The Consumer Financial Protection Bureau (CFPB) has unveiled a proposed new rule on binding arbitration, those clauses usually buried in the fine print of your credit card agreement that say you can’t sue your bank. A 2015 bureau study on arbitration showed that very few consumers even consider bringing individual actions against financial service providers, in court or in arbitration and that class actions provide “a more effective means for consumers to challenge problematic practices by these companies”.
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The proposal would make it illegal for many companies that offer consumer financial products to include clauses that bar class actions in the their contracts.
Under the proposal, companies could still use arbitration clauses, but would have to state explicitly that consumers can sign onto class actions.
The field hearing coincides with the release of the CFPB’s Notice of Proposed Rulemaking (NPR) on the use of arbitration agreements in certain consumer financial services contracts.
Lauren Saunders, associate director of the National Consumer Law Center, called forced arbitration a “get-out-of-jail-free card” that lets banks, payday lenders and debt relief scammers avoid accountability when they violate the law.
The proposal, which has been opposed by industry groups, wouldn’t ban arbitration entirely but would instead stop the practice of barring consumers from joining a class action suit.
Clinton went on to say that if she is elected president, she will build on the CFPB’s initial efforts to further address the problems caused by mandatory arbitration clauses and protect consumers from unfair and deceptive practices.
It also stated eliminating arbitration would actually make it harder for consumers to obtain redress in situations where claims were small and too infrequent to result in a class-action lawsuit.
“Arbitration has long provided a faster, better, and more cost-effective means of addressing consumer disputes than litigation or class action lawsuits”.
The groups responded to the proposal by pointing out that class action lawsuits can lead to a bigger payout for lawyers than they do for participants, who sometimes receive minor payments. Consumer advocates say these arbitrators are often biased and routinely rule against consumers.
The proposed rule does not require congressional approval, but will be open to public for a 90-day comment period. But despite their widespread use, 75 percent of consumers don’t know if they are subject to an arbitration clause, according to a report released past year by the agency. Financial services companies and groups including the U.S. Chamber of Commerce have argued arbitration is a valuable tool to help avoid frivolous, expensive lawsuits that often don’t do much to benefit borrowers. Based on our research, we believe that any prospect of meaningful relief for groups of consumers is effectively extinguished by forcing them to fight their legal disputes as lone individuals.
The agency said it is considering publishing information it would collect in some form so the public can monitor the arbitration process.
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In 2013, Congress prohibited arbitration agreements in residential mortgages and home equity lines of credit. Behind the scenes, the CFPB will be bombarded with comments from the financial sector essentially insisting on the right to be able to bilk consumers without them being able to band together and fight back.
