CFPB seeks to ban mandatory arbitration of consumer disputes over banking, credit cards and loans
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Updated: In a proposed rule (PDF) that could potentially affect hundreds of millions of accounts, the Consumer Financial Protection Bureau is seeking to ban mandatory arbitration clauses in a wide range of consumer contracts.
Under the rule, which is to take effect next year after a public comment period, mandatory arbitration clauses that prohibit consumers from banding together in class actions would not be allowed in standard contracts for personal bank accounts, credit cards, prepaid cards and payday, installment and student loans, among other financial products, according to the Associated Press, the Plain Dealer and the Wall Street Journal (sub. req.).
“These widely used clauses leave consumers with no choice but to seek relief on their own—usually over small amounts,” the CFPB says in a news release. “With this contract gotcha, companies can sidestep the legal system, avoid accountability, and continue to pursue profitable practices that may violate the law and harm countless consumers. The CFPB’s proposal is designed to protect consumers’ right to pursue justice and relief, and deter companies from violating the law.”
Such mandatory arbitration provisions already are prohibited by the CFPB in most residential mortgages and home equity loans.
The U.S. Supreme Court has upheld mandatory arbitration provisions, which plaintiffs lawyers and advocacy groups describe as putting consumers at a disadvantage against big companies.
The U.S. Chamber of Commerce and financial industry trade groups say mandatory arbitration benefits consumers, in part because it is faster and less expensive than class-action litigation, according to the St. Louis Post-Dispatch.
“Under the current class-action litigation rules, many small claims that involve issues that customers actually care about, such as alleged overcharges or the failure to credit a deposit on time, are unlikely to be classable because they are individualized disputes,” says the Chamber of Commerce in a letter to the CFPB. “For these claims, consumers will therefore have virtually no economically rational options for seeking redress: arbitration (in which most companies pay for consumers to bring claims against them, making it free to the consumer) will be gone; class action litigation will not be available; and rational consumers are not going to pay a $400 filing fee to pursue a $25 claim in court.”
Public Citizen provides a copy of the letter (PDF).
Unaddressed in the Chamber of Commerce letter is the fact that a number of state and federal statutes under which a consumer might sue provide for a mandatory or discretionary award of attorney’s fees to a prevailing plaintiff.
A Congressional Research Service report (PDF) published in 2008 discusses theories under which awards are made in federal court. (See page 64 for a lengthy list of applicable statutes.)
Related coverage:
ABAJournal.com: “Arbitration clauses effectively eliminate consumer rights for many, New York Times reports”
Albuquerque Journal (sub. req.): “Consumer agency unveils ban on mandatory arbitration”
The Hill: “Consumer bureau: Proposed rule protects right to sue”
Forbes: “CFPB Delivers A Huge Favor To Lawyers With New Arbitration Rules”
Updated on May 6 to provide link to CFPB news release and include information from release.
