It might get easier for groups of consumers to sue financial companies for alleged wrongdoing.
The Consumer Financial Protection Bureau is considering potential rules that would ban financial firms from using so-called “arbitration clauses.” These clauses typically block customers from seeking group lawsuits to win relief in disputes with credit card providers, lenders and other companies offering or servicing financial products.
Contracts for many of these products, including credit cards, bank accounts and student loans, carry clauses that typically state either the company or the consumer can require disputes to be resolved by privately appointed arbitrators, rather than the court system.
The clauses usually also block consumers from pursuing group claims through the arbitration process.
Financial and business groups generally support arbitration as a more efficient and less expensive way of resolving disputes with customers. A 2013 U.S. Supreme Court ruling reinforced the right of companies to set their own rules for resolving disputes with customers. That decision effectively limits class-action lawsuits in such disagreements.
However, consumer advocates say that arbitration unfairly limits customers’ options and potential financial recovery.
“Consumers should not be asked to sign away their legal rights when they open a bank account or credit card,” said CFPB Director Richard Cordray. “Companies are using the arbitration clause as a free pass to sidestep the courts and avoid accountability for wrongdoing. The proposals under consideration would ban arbitration clauses that block group lawsuits so that consumers can take companies to court to seek the relief they deserve.”
Arbitration clauses affect tens of millions of consumers. As a result, no matter how many consumers are injured by the same conduct, consumers must resolve their claims individually against the company, which few consumers do, the CFPB says.
The Bureau is publishing an outline of the proposals under consideration as it begins the process of potential rulemaking.
The CFPB sais the benefits of the proposals would include:
A day in court for consumers: The proposals under consideration would give consumers their day in court to hold companies accountable for wrongdoing. Often the harm to an individual consumer may be too small to make it practical to pursue litigation, even where the overall harm to consumers is significant. Previous CFPB survey results reported that only around 2 percent of consumers surveyed would consult an attorney to pursue an individual lawsuit as a means of resolving a small-dollar dispute. In cases involving small injuries of anything less than a few thousand dollars, it can be difficult for a consumer to find a lawyer to handle their case. Congress and the courts developed class litigation procedures in part to address concerns like these. With group lawsuits, consumers have opportunities to obtain relief they otherwise might not get.
Deterrent effect: The proposals under consideration would incentivize companies to comply with the law to avoid lawsuits. Arbitration clauses enable companies to avoid being held accountable for their conduct; that makes companies more likely to engage in conduct that could violate consumer protection laws or their contracts with customers. When companies can be called to account for their misconduct, public attention on the cases can affect or influence their individual business practices and the business practices of other companies more broadly.
Increased transparency: The proposals under consideration would make the individual arbitration process more transparent by requiring companies that use arbitration clauses to submit the claims filed and awards issued in arbitration to the CFPB. This would enable the CFPB to better understand and monitor arbitration cases. The proposal under consideration to publish the claims filed and awards issued on the CFPB’s website would further increase transparency.