CLEVELAND, Ohio -- Arguing that consumers should be able to sue banks, the Consumer Financial Protection Bureau plans to stop banks and other financial companies from imposing mandatory arbitration clauses on customers.
The CFPB today plans to announce aproposed new ruleto prohibit forced arbitration clauses, which the CFPB calls "contract gotchas" that prevent customers from banding together to sue their bank for suspected 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 written statement .
"Many banks and financial companies avoid accountability by putting arbitration clauses in their contracts that block groups of their customers from suing them," Cordray said. "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."
Many agreements for bank accounts, credit cards and other financial products include mandatory arbitration clauses, the CFPB says. 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. This prevents group claims and class action lawsuits.
This phenomenon affects millions of contracts, the CFPB noted.
But the Consumer Bankers Association in Washington, D.C., argues that arbitration should remain as the preferred course of action because cases that go to arbitration are resolved more quickly and lead to higher awards for consumers. Arbitration cases typically last two to seven months; class action cases take nearly two years to resolve, the CBA said. It added that class-action attorneys are the big winners of court cases.
Further, the CBA said, disputes between consumers and companies are usually resolved informally rather than in court. "Companies have strong incentives to maintain deep, well-informed, mutually satisfactory relationships with customers," the industry group said.
The American Bankers Association agreed."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 and CEO of the ABA, said in a written statement.
"Banks resolve the overwhelming majority of disputes quickly and amicably," he added. "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."
The CFPB today is giving notice of its proposed new rule. Once the proposed new rule is published in the Federal Register, a 90-day public comment period begins.
The CFPB's proposal:
To read the proposed new rule or provide comments to the CFPB, seethis link.
The ban on forced arbitration clauses would apply to most consumer financial products and services that the CFPB oversees. These would include products offered by companies that take customer deposits, that lend money or transfer or exchange money. Congress already halted arbitration agreements in the mortgage industry.
After the financial crisis and the barrage of criticism aimed at banks, Congress called for the CFPB to look at mandatory arbitration clauses and issue rules that protect consumers, if deemed necessary.
The CFPB's study, released a year ago, showed that few consumers even think about taking action against their bank in court or through arbitration. But class-action lawsuits can be "a more effective means" for consumers to take on banks and force changes in policies. The study showed that at least 160 million consumers were eligible for recourse over a five-year period that was studied. Settlements totaled $2.7 billion. But in cases where arbitration is mandatory, "companies are able to use those clauses to block class actions," the CFPB said.
The National Consumer Law Center praised the CFPB, saying consumers should have the right to go to court when banks and other companies break the law.
"Forced arbitration is a get-out-of-jail-free card that lets banks, payday lenders and debt relief scammers avoid accountability when they violate the law," Lauren Saunders, associate director of the National Consumer Law Center, said in a statement.
"Forced arbitration and class action bans force consumers into a biased, secretive, and lawless forum, preventing either a court or an arbitrator from ordering a lawbreaker to repay all of its victims."
Back at the American Bankers Association, Nichols said the CFPB study showed arbitration can be beneficial. Banning it will mean companies will"face a flood of attorney-driven class action suits from which consumers receive virtually nothing."
If you purchase a product or register for an account through a link on our site, we may receive compensation. By using this site, you consent to our User Agreement and agree that your clicks, interactions, and personal information may be collected, recorded, and/or stored by us and social media and other third-party partners in accordance with our Privacy Policy.
