Financial companies could be banned from using legal fine print that prevents their customers from joining class-action lawsuits, according to new rules being proposed by the Consumer Financial Protection Bureau.
The CFPB is proposing rules that would restrict the use of so-called mandatory arbitration clauses, which prevent customers from collectively taking complaints before a judge and instead require the use of private arbitrators, a process that often favors large corporations.
The rules under consideration would ensure that consumers can sue and join class-actions, and more strictly oversee arbitration hearings between financial companies and their customers. The rules would also require companies to disclose the awards and claims made in arbitration cases to the regulator.
“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 statement. “Many banks and financial companies avoid accountability by putting arbitration clauses in their contracts that block groups of their customers from suing them."
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.
The proposed rules, released on Thursday as part of a request for public comment, came about because "pre-dispute arbitration agreements are being widely used to prevent consumers from seeking relief from legal violations on a class basis," the CFPB said. "Consumers rarely file individual lawsuits or arbitration cases to obtain such relief."
With credit card issuers, the CFPB found it's far more likely for the issuer to bring credit card holders to court than vice versa. In 2012 alone, a CFPB study found that issuers brought 41,000 such cases, nearly all around debt collection in small claims courts.
Some groups supporting the CFPB's proposed rules say class-action lawsuits are an essential tool for tackling bad behavior by financial companies.
"Small-dollar financial harms are common in financial services, such as abusive interest rates and tacked-on charges and illegal fees," the National Association of Consumer Advocates said in a response to an earlier draft of these rules. "The companies imposing these harms are profiting from the fact that consumers’ hands are tied, unless those similarly wronged can band together in class actions to pursue claims."
If they go through, the rules the CFPB proposed would apply to banks, other lenders, loan servicers, auto loan brokers, debt management companies, payment companies, check cashing companies, and debt collectors.
Some business groups insist that sending disputes to private arbitration, rather than courts, is good for consumers. A group of trade organizations representing the financial industry said in a July letter that the CFPB's own study showed arbitration "has significant, demonstrable benefits over litigation in general and class action litigation in particular."
The trade groups said that a ban or restriction on arbitration agreements would "relegate" consumers to class-actions, "in which they are likely to receive either no
benefits at all or minuscule benefits that are awarded years after the initiation of the lawsuit."
When faced with the proposed rule Thursday, banking groups were no less opposed and made similar arguments about how class actions were not more likely to bring more money to consumers who have been harmed by financial institutions.
“Consumers will get less and pay more if the CFPB’s proposal to sideline arbitration and promote class actions is ultimately adopted. Banks resolve the overwhelming majority of disputes quickly and amicably,” said Rob Nichols, the head of the American Banking Association, in a statement.
“When needed, arbitration is an efficient, fair and low-cost method of resolving disputes in a fraction of the time — and at a fraction of the cost — of expensive litigation. This helps keep costs down for all consumers.”
Cordray made the argument in a hearing in Albuquerque, New Mexico today that even if the harm from a given business practice to individual consumers is small, it's still crucial to have class actions."The fact is that certain corporate policies and practices can be lucrative to businesses but harm large numbers of individuals only on a minor basis," Cordray said.
Class actions, he said, "[have] proved particularly meaningful in the arena of consumer finance, where companies that violate the law may do small amounts of harm to thousands or even millions of consumers."
Mandatory arbitration agreements have already been restricted in certain areas. The Dodd-Frank package of financial reforms got rid of forced arbitration for mortgages and home equity loans, and the Department of Defense has passed rules preventing creditors from including such language in dealings with active duty service members.
This piece has been updated with further quotes from Richard Cordray and Rob Nichols.