Consumer bureau: No language blocking class-action suits

A top financial regulator announced Wednesday it was considering barring a common move by financial companies to limit customers’ legal options.

The Consumer Financial Protection Bureau is moving forward with a plan to propose rules that would bar so-called “forced arbitration” clauses common in many financial product contracts. The watchdog argued that the language amounted to a “free pass” for companies, since they can prevent customers from taking them to court for wrongdoing.

{mosads}“Consumers should not be asked to sign away their legal rights when they open a bank account or credit card,” said CFPB Director Richard Cordray. “Companies are using the arbitration clause as a free pass to sidestep the courts and avoid accountability for wrongdoing. 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.”

If the CFPB goes ahead with its rules, it would not ban arbitration clauses outright. Rather, the regulator would require the clauses to first allow consumers the opportunity to go to court before going to arbitration, and also require companies to report the outcomes to the CFPB for monitoring. The CFPB also said it was considering making claims and awards public for all to see.

The rules are likely to face a significant challenge from the business sector, which was dismissive of a March report the regulator put out criticizing the practice. Arbitration clauses found in contracts for products like credit cards or bank accounts typically bar customers from pursuing class-action lawsuits, and instead require arbitration to settle grievances.

An earlier study by the CFPB on the practice found that consumers regularly received far less through arbitration than a court challenge. On average, arbitration settlements yielded $175,000 for consumers, compared to nearly $1 million in court cases.

The study, mandated by the Dodd-Frank financial reform law, also found that most Americans did not even realize they had signed on to binding arbitration language when they signed contracts for financial products.

But that study was quickly criticized by the business community, which argued the CFPB had produced a biased product. Business groups, like the U.S. Chamber of Commerce, argued that clauses requiring arbitration ensures an efficient and cost-effective way to settle disagreements without protracted and costly court fights.

The CFPB has not yet proposed the rules, but instead has put together an outline of what it is considering, which it will put forward to industry stakeholders on its Small Business Review Panel. But Wednesday’s announcement marks the CFPB’s first step in issuing formal rules barring the practice.

This post updated Oct. 7 at 11:43am, with updated language to reflect that the CFPB is not banning arbitration clauses, but ensuring consumers can seek class-action lawsuits.