The Consumer Financial Protection Bureau is seeking public comment on a proposal to ban banks and other financial institutions from putting mandatory arbitration clauses in their contracts that prevent consumers from joining class-action lawsuits to sue for wrongdoing.
“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,” CFPB Director Richard Cordray said in a May 5 news release.
“Our proposal seeks comment on whether to ban this contract gotcha that effectively denies groups of consumers the right to seek justice and relief for wrongdoing,” he said in the release.
Some institutions including the American Bankers Association oppose the proposed rule.
“Consumers will get less and pay more if the CFPB’s proposal to sideline arbitration and promote class actions is ultimately adopted,” Rob Nichols, president of the ABA, said in a written statement.
An online statement by the U.S. Chamber of Commerce called the proposed rule “the biggest gift to plaintiffs’ lawyers in a half century.” The chamber and ABA believe the rule would result in more profits for class-action lawyers and less money for consumers.
Class action lawsuits
The CFPB was required to study the use of mandatory arbitation classes in consumer financial markets under the Dodd-Frank Wall Street Reform and Consumer Protection Act, The CFPB’s five-year study released in March 2015 showed class actions result in hundreds of millions of dollars in relief to consumers each year and can cause companies to alter legally questionable conduct. Through these actions, at least 160 million class members were eligible for relief, with settlements totaling $2.7 billion in cash as well as attorney’s fees and expenses, according to the CFPB news release. However, companies often were able to use mandatory arbitration clauses to block class actions, the CFPB found.
Under the CFPB’s proposal, companies would still be able to include arbitration clauses in their contracts, but would have to state the clauses cannot be used to stop consumers from being part of a class-action lawsuit. Companies also would be required to submit items related to arbitration cases to ensure they are fair to consumers.
The rule would give consumers a greater chance to gain justice when companies skirt laws, deter companies from illegal practices and increase transparency, the CFPB news release stated.
The proposal is available at: http://files.consumerfinance.gov/f/documents/CFPB_Arbitration_Agreements_Notice_of_Proposed_Rulemaking.pdf. The CFPB said it will be placed on the Federal Register website where the public can comment. For more information, visit http://www.consumerfinance.gov/.