Have you ever wanted to join a class-action suit against your bank?
A rule proposed Thursday by the Consumer Financial Protection Bureau could potentially redefine the way consumers interact with their banks and credit card companies by banning mandatory arbitration clauses that prohibit customers from filing class-action lawsuits.
Many financial institution contracts contain such clauses, which consumer advocates say deny people the right to their day in court and make it harder to stamp out corporate wrongdoing.
Arbitration clauses are generally embedded in the fine print that most customers don't bother to read. And over time, they have crept into contracts for everything from wireless service to nursing homes, although the Bureau’s proposed rule would be limited to a relative handful of banking, lending and debt-collection activities.
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Consumer advocates have said for years that these clauses take away consumers’ rights by preventing class-action lawsuits and letting companies evade consequences for wrongdoing. The CFPB seemed inclined to agree, referring to them as “contract gotchas” in a press release.
“This practice has evolved to the point where it effectively functions as a kind of legal lockout,” CFPB director Richard Cordray said in prepared remarks on Thursday when announcing the proposed rule at an event in Albuquerque.
The proposed rule would prohibit financial services companies from including mandatory arbitration clauses that forbid class-action suits against them, and would require information to be collected on arbitration undertaken by those companies. People and organizations will have 180 days from when the rule is entered into the Federal Register to comment on it.
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Lauren Saunders, associate director of the National Consumer Law Center, said class-action suits are important, because even if a customer loses a few hundred dollars or more over improper practices, the logistical and financial hurdles of filing a suit make the likelihood that he or she would go to court small to nonexistent. A collective complaint that obtains class-action status, on the other hand, can make whole a large group of customers, some of whom might not even realize they had been wronged.
Opponents of the CFPB’s rule say arbitration is quicker and cheaper than litigation.
“Banks resolve the overwhelming majority of disputes quickly and amicably,” Rob Nichols, president and CEO of the American Bankers Association, said in a statement, calling arbitration “an efficient, fair and low-cost method of resolving disputes.”
Detractors also say class actions enrich plaintiffs’ lawyers and force companies to rack up huge legal bills, while delivering little in the way of monetary relief to customers.
Attorneys do make money, but the CFPB contends that consumers are the primary beneficiaries. A study the agency issued last year on the impact of class-action bans and mandatory arbitration clauses found that lawyers earned $424 million in financial-services class-action cases, or 16 percent of the total gross relief awarded to plaintiffs.
The U.S. Chamber of Commerce said consumers benefit from the current system because financial institutions subsidize the cost of arbitration. Saunders countered that contracts vary, and this subsidization is not across-the-board. Some arbitration clauses charge customer upfront, or make them pay the institution’s cost if the arbitrator rules against them.
And that subsidization can be a double-edged sword: A 2007 study by Public Citizen of credit-card arbitration disputes over a four-year period found that the arbitrators ruled against the consumer 94 percent of the time. The group said arbitration firms have a conflict of interest because, since banks are effectively the ones hiring them, they have an incentive to rule in the institution’s favor.
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The Chamber of Commerce warned in its statement that, if enacted, the CFPB’s proposed rule would prevent companies from offering arbitration because they would have to divert those funds to prepare for the contingency of lawsuits.
Saunders called this argument a “red herring,” saying, “They can still do individual arbitration without a class action ban… More likely, what they’re really trying to do is hide their widespread wrongdoing from the light of day.”
The CFPB also suggested that the prospect of class-action lawsuits could help keep companies honest by acting as a deterrent, because if companies knew they might face costly and time-consuming litigation and the prospect of millions or even billions of dollars in damages, they would be less likely to embrace practices that bend or break the rules.
Other consumer advocates agreed.
“[It will] deter bad actors who know that if they mistreat consumers even in small ways, those consumers will be able join together and efficiently get the remedies they are entitled to,” Rachel Weintraub, legislative director and general counsel at watchdog group Consumer Federation of America, said in a statement. “This rule will restore an important tool to consumers who have been harmed.”