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Most Arbitration Clauses Could Be Banned from Bank Contracts

Banks and credit card companies could not use arbitration clauses to stop customers from joining class-action lawsuits, under a new draft rule.
Image: Credit Card wallet
Credit Card walletJoe Raedle / Getty Images

Banks and credit card companies may not force customers to sign away their legal rights to take part in class-action lawsuits, under an early-stage U.S. government proposal that is likely to draw ire from Wall Street.

The Consumer Financial Protection Bureau said on Wednesday the proposal marked the first step in the process of potentially drafting regulations to ban certain "free pass" arbitration clauses, often buried in fine print, that consumers must sign off on when opening financial accounts.

Banks, credit card companies, lenders and broker dealers typically use such clauses as a way to shield themselves from lawsuits and lower their legal costs. Signers cannot file claims in federal courts, and have to resolve disputes individually through privately appointed arbitrators.

"The essence of the proposals we have under consideration is that they would get rid of this free pass that prevents consumers from holding their financial providers directly accountable for the harm they cause when they violate the law," CFPB Director Richard Cordray said in prepared remarks he plans to deliver at a hearing on the topic in Denver, Colorado.

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"Companies should not be able to place themselves above the law and evade public accountability by inserting the magic word 'arbitration' in a document and dictating the favorable consequences," he said.

Arbitration clauses have long been a target of consumer advocacy groups which say they curb legal rights. But Wall Street banks have historically opposed any efforts to chip away at arbitration clauses.

The 2010 Dodd-Frank Wall Street reform law gave both the CFPB and the Securities and Exchange Commission the power to restrict or ban arbitration clauses, and it also required the CFPB to study pre-dispute arbitration clauses.

Some Democrats in Congress have urged the SEC to write a rule, but the agency has not taken up the issue so far.

The CFPB, by contrast, is inching toward action.

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In March, the CFPB released its arbitration clause study which found that few consumers actually seek individual relief through arbitrations even though millions are eligible for group settlements. The vast majority of consumers do not even know if they are subject to an arbitration clause, the study showed.

The CFPB on Wednesday published an outline of proposals it will consider.

Not all arbitration clauses would be banned. Individual disputes, for instance, could still be resolved through arbitration.

But it would prohibit companies from including clauses that block class-action lawsuits. Companies that choose to use arbitration clauses for individual cases would have to submit information to the CFPB concerning any claims filed and awards issued.

The plan would apply to credit cards, checking and deposit accounts, prepaid cards, money transfer services, certain auto loans, auto title loans, payday loans, private student loans and installment loans.