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Suing Banks Will Be Much Easier If U.S. Regulator Gets Its Way

  • CFPB targets arbitration in plan to allow class-action suits
  • Industry says rule would increase legal costs, hurt consumers

Suing your bank will become a lot easier if a U.S. regulator has its way.

At issue are terms that companies routinely insert in contracts for credit cards, payday loans and other products that require consumers to settle disputes through arbitration. The Consumer Financial Protection Bureau plans to propose a rule Thursday that would circumvent those clauses by allowing groups of people to join together to pursue class-action lawsuits when they feel they’ve been wronged.

“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," CFPB Director Richard Cordray said in a statement. “Many banks and financial companies avoid accountability by putting arbitration clauses in their contracts that block groups of their customers from suing them."

Telegraphed by the CFPB for months, the proposal inserts the agency into a simmering debate over whether the power to sue would actually benefit consumers or mostly just line the pockets of lawyers. Consumer advocates say class-action lawsuits are an essential tool to help the public win relief and to hold companies accountable for bad behavior. But the finance industry argues that curbing arbitration will result in higher legal costs that banks will ultimately pass on to consumers.

Lawyers Win

“There’s only one winner coming out of this rule: the plaintiff’s class action bar," said Alan Kaplinsky, head of the consumer finance practice at Ballard Spahr, who played a critical role in the rise of using arbitration clauses in contracts. “It’s not good for the industry, for banks or for nonbanks. And consumers are going to be net losers, it’s a lousy trade."

Hundreds of millions of contracts include provisions that bar consumers from bringing group suits through the arbitration process and companies have used the clauses to keep fights out of court almost two-thirds of the time, the CFPB found in a study released last year. Very few consumers bring, or even consider, individual actions against their financial service provider in court or in arbitration, the study showed.

The regulator’s proposal would cover new agreements for products such as credit cards, auto loans, credit reports and even mobile phone services that provide third-party billing. There will be a public comment period for 90 days before the regulator could issue a final rule. 

The soonest it will likely take effect is mid-2017 and companies will have 210 days to comply with the requirements. Companies can still include arbitration clauses in contracts, but they must state that those cannot be used to stop individual consumers from joining a class-action case. Companies that do have arbitration clauses will be required to submit some related information to the CFPB, the bureau said.

Challenge Expected

Lawsuits challenging the rule are probable. Financial services companies and groups including the U.S. Chamber of Commerce have argued arbitration is a valuable tool to help avoid frivolous, expensive lawsuits that often don’t do much to benefit borrowers.

“The proposed rule is a wolf in sheep’s clothing," David Hirshmann, head of the Chamber’s Center for Capital Markets Competitiveness, said in a statement Wednesday. “The agency designed to protect consumers is proposing a rule that will end up hurting them.”

Consumer advocates say that restricting arbitration clauses will deter bad actors and force companies to reconsider certain activities because consumers will be more inclined to sue. While the CFPB’s proposal would only affect financial agreements, it could have a broader impact on all sorts of contracts that feature arbitration provisions such as employment agreements, according to Mike Calhoun, president of the Center for Responsible Lending.

“This will have a very significant impact," Calhoun said in a Wednesday interview. “This could set a precedent for legislation or other actions that would put these protections in place."

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