The Consumer Financial Protection Bureau has finalized a rule banning arbitration clauses. The agreements “bar groups of consumers from joining together to seek justice by vindicating their legal right,” CFPB Director Richard Cordray said. (Jacquelyn Martin/AP)

The government’s consumer watchdog finalized a rule Monday that will make it easier for people to challenge financial companies in court.

The rule by the Consumer Financial Protection Bureau targets arbitration clauses, which are frequently tucked into the fine print of user agreements for credit cards, bank accounts and other consumer products. As a condition for receiving services or products, consumers often give up their right to join a class-action lawsuit with these clauses, and instead agree to settle any disputes in a private process known as arbitration.

Under the long-awaited rule, companies will be banned from using these agreements to block consumers from joining group lawsuits. The rule also aims to increase awareness about how consumers fare when they go to arbitration, since companies will be required to report those outcomes to the CFPB.

“In practice, companies use these clauses to bar groups of consumers from joining together to seek justice by vindicating their legal right,” said Richard Cordray, the CFPB’s director, during a call with reporters.

The new rule comes as Republicans and some business groups are pushing to defang the independent agency and weaken many Obama-era regulations. The move is likely to prompt more criticism from CFPB opponents who argue that the agency has too much power over businesses. Some Republicans and business groups are calling for Cordray to be fired or for the agency to be restructured to be led by a bipartisan commission. The CFPB is awaiting a court decision on a case about whether the president should be able to fire the agency’s director at will, as opposed to the current structure that says the director can only be removed for cause.

“It’s a courageous move that’s clearly done for the public interest,” said Rohit Chopra, a former CFPB executive and a senior fellow at the Consumer Federation of America, a consumer advocacy group.

Supporters of arbitration say the clauses can help companies and consumers save money by minimizing legal costs. They also say that many consumers have their disputes resolved fairly through arbitration, sometimes receiving more relief when they go through arbitration than they would in class-action lawsuits.

“This is a boon to the trial lawyers and a bust for consumers,” Richard Hunt, president of the Consumer Bankers Association that represents retail banks, said in an interview.

Cordray said Monday, however, that consumers rarely pursue arbitration when they are owed small dollar amounts. He said class-action lawsuits can be a way for consumers to seek relief when they cannot afford to hire a lawyer. “Very few people have the time or the money to fight on their own over a small amount of money,” he said.

He also said that class-action lawsuits can help increase awareness about harmful business practices that might not receive much attention when they are addressed through arbitration, since companies were not previously required to report those cases.

The consumer watchdog has stayed busy since the election, rolling out enforcement actions against companies that it says have misled or overcharged consumers. The targets included well-known names, such as the credit-reporting bureau Experian, mortgage company Ocwen and student-loan servicer Navient.

The rule is expected to be published in the federal register in the next week or two. It will apply to new accounts opened about eight months after that.

Clarification: This story has been updated to clarify that the rule will apply to new accounts opened roughly eight months after the regulation is published.

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