Has it ever occurred to you to sue your bank? If you’re like most people then you’ve never even thought about it, but that may be changing thanks to some new changes in the industry.
Still, the majority of consumers aren’t even aware that they’ve signed away their right to join class actions against their bank or credit card company. Now, the CFPB (Consumer Financial Protection Bureau) wants to ban companies from including so-called ‘arbitration clauses’ in their service agreements, calling them a “free pass to avoid accountability.” In general, the clauses tend to require consumers to go into arbitration over a dispute, rather than joining a group lawsuit pursuing compensation from a company that has broken the law or caused harm, or to seek a remedy in a courtroom.
These kinds of stipulations that consumers agree to when they open a bank account or credit card are often hidden away in the contracts amongst a sea of jargon. It’s quite often that customers don’t understand these stipulations, or even notice them at all. The CFPB has been studying the clauses as part of its mandate under the Dodd-Frank Act, which also bans the use of arbitration clauses in mortgage contracts. The number of credit card companies that include such a clause in their agreement is astounding. More than half of all credit card companies use these types of clauses. According to the CFPB three out of four consumers had no idea they had even agreed to it.
“Consumers should not be asked to sign away their legal rights when they open a bank account or credit card,” CFPB director Richard Cordray said in a statement. “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.”
It’s not only Banks and credit card companies that are using these clauses. An earlier CFPB study found that the clauses were also common in payday loans, where almost every payday lender with storefronts in the states of Texas and California include the clauses, private student loan markets where 86% of the largest lenders use them, as well as around 88% of the largest cell phone service providers.
There are a number of financial institutions that are pushing back against the proposal. The National Association of Federal Credit Unions recently stated, “The announcement could suggest broad, sweeping reporting requirements that may unintentionally burden credit unions.” There are many other institutions that are sounding the alarm. The American Bankers Association said that banning the clauses could “result in increased costs to consumers.”
The financial services industry has argued that arbitration is a faster and easier way to resolve disputes, compared with having to go through the courts. While that may well be the case, the CFPB found that the clauses could act as a barrier to class actions. It recently stated- “There is no evidence of arbitration clauses leading to lower prices for consumers.” They also said, “the presence of such a clause means that if you want to claim financial relief from a company that has wronged you, you must proceed individually.” “That’s true, no matter how small your claim and no matter how many customers may have been harmed by exactly the same wrongdoing. And even if you win your claim and receive compensation for your wrong, the company may continue the illegal and harmful behavior toward other consumers.”
If the proposal came through, it would make it illegal for many companies, that offer consumer financial products, to include clauses that bar class actions in their contracts. The types of businesses that would be affected include credit card companies, some auto lenders, banks, payday lenders and money-transfer services. The agency noted that it’s not proposing to ban arbitration clauses in their entirety.
In the case of arbitration clauses that apply to individual disputes, the CFPB would require companies to submit the claims and any awards that were issued to the agency, which says it will monitor the process to make sure it’s fair for consumers.
