For years, many consumers opening credit cards or using almost any kind of financial product have been banned from challenging those companies in class action lawsuits.
But new rules proposed Thursday by the Consumer Financial Protection Bureau could change that.
The long-awaited proposal would target arbitration clauses, agreements that are typically tucked into the fine print of contracts that consumers need to agree to before opening accounts or buying a product.
The little-known clauses often steer customers into a private process known as arbitration. Many customers may not realize until much later, after an issue has come up, that they had given up the right to sue, consumer advocates say.
But under the proposed rules , which do not eliminate arbitration clauses completely, financial companies would no longer be able to use arbitration clauses that prevent consumers from taking part in class action suits. The proposed changes would also make it easier to know how customers fare when they go into arbitration with a company.
“Many banks and financial companies avoid accountability by putting arbitration clauses in their contracts that block groups of their customers from suing them,” Richard Cordray, director of the Consumer Financial Protection Bureau, said in a statement.
The proposal immediately faced fierce opposition from financial groups arguing that the rules would hike legal costs and push more consumers into frivolous class action suits. The groups responded to the proposal by pointing out that class action lawsuits can lead to a bigger payout for lawyers than they do for participants, who sometimes receive minor payments.
“Consumers will get less and pay more if the CFPB’s proposal to sideline arbitration and promote class actions is ultimately adopted,” Rob Nichols, president of the American Bankers Association said in a statement.
Still, it’s not clear whether industry groups will be able to stop the rules, which do not require congressional approval, from going into effect. Some supporters of arbitration said that some companies may decide to stop subsidizing costs if they face higher legal fees.
“If this proposed regulation becomes final, I believe that all companies will abandon arbitration,” said Alan Kaplinsky, an attorney who helped spread the use of arbitration clauses, during a field hearing on the issue Thursday.
The CFPB estimates that tens of millions of consumers are subject to arbitration clauses. But despite their widespread use, 75 percent of consumers do not know if the clauses apply to them,
according to a report released last year by the agency.
Consumer advocates say that few people end up going into arbitration when issues arise. They also say people are unlikely to challenge companies in court when class actions are banned, especially over small dollar amounts. Those losses can seem minor when compared to the hundreds or thousands of dollars it might cost to file an individual lawsuit, said Thaddeus King, an officer with Pew Charitable Trusts’ consumer banking project.
Another point of dispute when it comes to arbitration is whether the process is fair. Critics say that the arbitrators who decide the cases may have a financial incentive to side with the corporations that hire them to resolve the disputes. Meanwhile, supporters of arbitration say companies keep costs down for consumers by subsidizing arbitration fees .
But in reality, it is difficult to know if any one side – the consumer or the corporation – is more likely to come out ahead. The outcomes of most arbitration cases are kept private, with consumers having to sign confidentiality agreements.
The CFPB hopes to shed light on the process by requiring companies to report the results of arbitration cases to the agency. Tracking those outcomes should make it easier for regulators and consumer groups to spot bias and other trends that may be harmful to consumers, the agency said. The proposed rules would apply to consumer financial companies that store or lend money, such as banks, credit unions, credit card companies and payday lenders. The protections would apply to new accounts opened after the rules go into effect, not existing accounts.
The bureau will now collect feedback during a 90-day comment period that will be incorporated into the final draft of the rule. The rule also needs to be reviewed by the Office of Management and Budget before it can be implemented.