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Consumers could soon find it easier sue their banks and credit card companies

Many consumers who sign up for a credit card with a financial company don’t realize they’re often signing away their right to sue the company. (Andrew Harrer/Bloomberg)

The Consumer Financial Protection Bureau is getting closer to creating rules that would make it easier for consumers to sue banks, credit card issuers and other companies selling financial products.

The proposals being considered target arbitration clauses — restrictions often included in the fine print of contracts for financial products such as credit cards, student loans and checking accounts — that the average person knows little about. Consumer advocates say the clauses are one of the biggest issues limiting consumer rights.

The clauses typically bar people from suing companies or joining class action lawsuits when legal issues come up, instead steering them into arbitration, a secretive process that some critics say is often stacked in the company’s favor. The outcomes are kept private, and the arbitration firms are often hired by the financial companies.

Consumers typically need to agree to the clauses if they want to open a credit card, take out a phone plan or do any form of business with these financial companies. But many people don’t find out they can’t sue the company until after they’re already facing a major issue, consumer advocates say.

The rules being considered by the CFPB would prohibit companies from blocking class action lawsuits, giving consumers a greater chance of challenging a company in court. They would also require companies to report the outcomes of arbitration cases to the CFPB, increasing transparency about how much companies do to help consumers when they make an error.

The CFPB is tackling arbitration as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which required the agency to study the clauses and determine if they are harming consumers. The law also banned the clauses from being used in mortgages.

In a report released earlier this year, the agency found that many consumers don’t know that they’ve signed away their right to sue a company or seek other relief until after they’ve faced a major issue they want to dispute. More than 75 percent of people surveyed by the CFPB have no idea if they are subject to arbitration clauses, according to the report.

Of those people who are affected by arbitration clauses, fewer than 7 percent realize that the clauses prevent them from challenging the company in court, according to the report. The study estimates that roughly half of all credit card debt is subject to arbitration clauses — affecting about 80 million consumers.

Critics say the arbitration clauses make it more difficult for consumers to challenge a company if they can’t afford legal representation on their own. The secrecy around the arbitration process can also make it difficult for other people to know about issues that may also affect them, those consumer advocates say. Because the outcomes of arbitration are private, it’s difficult for consumer advocates to track how customers are being treated.

Supporters of arbitration, however, say the process saves money for the customers and for the companies by limiting legal costs, which might otherwise raise customers’ costs. They say that customers who go through arbitration can find a solution that is more tailored to them than what they might get from a class-action suit, which groups together cases that might not be exactly the same. And going through arbitration can be less intimidating than going to court, according to representatives of the financial industry.

The bureau will next meet with small business groups later this month to discuss the potential rules. A formal rule proposal could come later this year.

Read more:

Why it’s nearly impossible for you to sue your credit card company

What happens when consumers are banned from class action lawsuits