The Consumer Financial Protection Bureau is moving forward with new rules that would prohibit the mandatory arbitration clauses in contracts that banks, credit card companies, and other rely upon to prevent consumers from pursuing lawsuits.
In an announcement on Wednesday, the Bureau announced that it is working on proposed rules that would prevent firms from “sidestepping the legal system, give consumers their day in court, and deter companies from wrongdoing.”
“Consumers should not be asked to sign away their legal rights when they open a bank account or credit card,” CFPB Director Richard Cordray said in a statement.
Many contracts for consumer financial products and services include arbitration clauses. These clauses typically state that either the company or the consumer can require disputes about that product to be resolved by privately appointed arbitrators) rather than through the court system. Where such a clause exists, either side can generally block lawsuits from proceeding in court. They also, in most cases, bar consumers from bringing group claims through the arbitration process.
The Dodd-Frank Act required the CFPB to study the use of arbitration clauses and gave it the power to issue regulations in response to those findings. According to the study, released in March, more than 75 percent of consumers surveyed in the credit card market did not know whether they were subject to an arbitration clause in their contract; fewer than 7 percent of those consumers covered by arbitration clauses realized that the clauses restricted their ability to sue in court.
The CFPB has published an outline of the proposals under consideration in preparation for convening a Small Business Review Panel to gather feedback as a first step towards potential rulemaking. The proposals under considered would ban companies from including arbitration clauses that block class action lawsuits in their consumer contracts. This would apply to most consumer financial products and services that the CFPB oversees, including credit cards, checking and deposit accounts, prepaid cards, money transfer services, certain auto loans, auto title loans, small dollar or payday loans, private student loans, and installment loans.
The proposals would not ban arbitration clauses in their entirety, but they would have to explicitly state they do not apply to cases filed as class actions unless and until the class certification is denied by the court or the class claims are dismissed in court. The proposals under consideration would also require that companies choosing to use arbitration clauses for individual disputes submit arbitration claims filed and awards issued to the Bureau, allowing it to monitor the process. The Bureau is also considering publishing the claims and awards for public review.
A list of questions available for public comment regarding the proposals can be found here.