By Elizabeth Dexheimer, Bloomberg News
The U.S. Consumer Financial Protection Bureau is making it easier for customers to sue banks, a move sure to rile Wall Street and congressional Republicans.
Financial firms will be restricted in using mandatory arbitration to block class-action lawsuits, the CFPB said in a statement Monday. Clauses requiring arbitration to settle disputes are inserted routinely in contracts for credit cards, payday loans and other financial products.
“These clauses allow companies to avoid accountability by blocking group lawsuits and forcing people to go it alone or give up,” CFPB Director Richard Cordray said in a statement.
“Our new rule will stop companies from sidestepping the courts and ensure that people who are harmed together can take action together.”
Lawmakers have 60 legislative days from the time they formally receive the rule to overturn the bureau’s decision.
Republicans have tried to use the review process, which allows challenges to recently issued regulations, to roll back a number of Obama-era rules, including CFPB’s plans for implementing tougher standards for prepaid debit cards.
Consumer advocates cheered the arbitration rule, arguing that class-action suits are an essential tool for helping harmed customers win relief and holding companies accountable for bad behavior. Finance-industry groups were quick to raise concerns, arguing that curbing arbitration will lead to higher legal costs that banks ultimately will pass on to consumers. Banking trade groups urged the Republican-led Congress to reverse it.
“Arbitration has long provided a faster, better and more cost-effective means of addressing consumer disputes than litigation or class-action lawsuits,” said Richard Hunt, president of the Consumer Bankers Association. “Given the longstanding benefits of arbitration, we encourage Congress to move swiftly and overturn this anti-consumer rule.”
The Dodd-Frank Act required that the CFPB study the use of mandatory arbitration clauses, according to the agency. The bureau found in a study that hundreds of millions of contracts include arbitration provisions and companies have used the clauses to keep fights out of court almost two-thirds of the time. Very few consumers even consider bringing individual actions against financial-service providers in court or in arbitration, the study showed.
The rule will cover new agreements for products such as credit cards, auto loans, credit reports and even mobile phone services that provide third-party billing. Companies can still include arbitration clauses in contracts, but they must state that those can’t be used to stop individual consumers from joining class-action cases.
It is also possible that industry groups will sue to overturn the CFPB rule. Groups including the U.S. Chamber of Commerce have said arbitration is a valuable tool to prevent frivolous, expensive lawsuits that often don’t do much to benefit borrowers.
Consumer advocates say restricting arbitration clauses will deter bad actors and force companies to reconsider certain activities because consumers will be more inclined to sue.
“The consumer agency’s rule will stop Wall Street and predatory lenders from ripping people off with impunity, and make markets fairer and safer for ordinary Americans,” Lisa Donner, executive director of Americans for Financial Reform, said in a statement.
For more news, visit Bloomberg.