A long-anticipated regulation proposed by the Consumer Financial Protection Bureau (CFPB) aims to restore the ability of customers to sue misbehaving banks and credit card companies.
The rule would prohibit so-called “forced arbitration” clauses, which firms have used to deny customers an opportunity to file class action lawsuits. Forced into one-on-one proceedings, cheated Americans are often over-matched by their corporate abuser’s legal resources, and unlikely to recoup any damages.
“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,” said CFPB Director Richard Cordray in a statement on Thursday.
The rule marks one of the more significant actions taken by the consumer watchdog since it was chartered by the Dodd-Frank reform law in 2010. Forced arbitration — called a “contract gotcha” by the CFPB — had been banned in the mortgage industry by Dodd-Frank. The law also specifically instructed the agency to study the practice throughout the financial sector.
Last March, the CFPB released a report, which found that three-out-of-four Americans were unaware that their credit card or bank account contracts contain hidden forced-arbitration language.
If the rule is finalized following a 90-day public comment period, it will apply only to financial firms regulated by the consumer watchdog. Other businesses, including telecoms and healthcare providers, have also increasingly relied on forced arbitration clauses — upheld as legal in 2011 by the Supreme Court.
Wall Street is expected to vigorously oppose the rule, since it could open them up to billions of dollars in claims, while forcing them to change business practices. The US Chamber of Commerce wasted no time in claiming that the regulation was a “wolf in sheep’s clothing,” that will harm consumers.
The CFPB’s findings, however, call that claim into disrepute. The bureau found that between 2010-2011, firms won $2.8 million in arbitration judgments against customers. During that same period, customers only won $400,000 from claims made against banks.
The investigation also concluded that the clauses stop one in ten Americans from being eligible to collect on class action lawsuits, costing them more than $1 billion without them even knowing it. It also found that forced arbitration does not generally lead to more favorable deals for consumers, by lowering the cost of business.
“I’m concerned but not surprised that the bureau found no evidence that forced arbitration leads to lower prices for consumers,” Sen. Sherrod Brown (D-Ohio) said last summer, in response to the release of the study.
The agency also hopes the rule will serve as a deterrent to future abusive practices.
“When companies know they can be called to account for their misconduct, they are less likely to engage in unlawful practices that can harm consumers,” the CFPB said in a statement.