The end could be near for those hard-to-understand clauses buried in the fine print of credit card, checking account and other financial agreements that force consumers to take disputes to arbitration — rather than to court.
The Consumer Financial Protection Bureau said Wednesday that it was considering sweeping new regulations that would ban arbitration clauses that block customers from joining class-action lawsuits.
“Consumers should not be asked to sign away their legal rights when they open a banking account or credit card,” said Richard Cordray, the bureau’s director. “Companies are using the arbitration clause as a free pass to sidestep the courts and avoid accountability for wrongdoing.”
The move could all but eliminate the common practice of requiring forced arbitration for consumer financial products and would face stiff opposition from big banking interests, which have argued that it helps keep costs down.
Companies still could require that individual disputes be heard by private arbitrators, the bureau said. But financial services firms would have to submit detailed information on claims and financial awards to regulators so the data could be analyzed and made public on the bureau’s website.
The bureau is launching a formal rule-making process for the new regulations, which would also apply to payday loans, prepaid debit cards and private student loans. Cordray is scheduled to hold a hearing on the issue in Denver on Wednesday.
In a study released in March, the bureau found that more than 75% of consumers didn’t know if they were subject to an arbitration clause for their credit cards and other financial services. And less than 7% of those covered by the provisions knew that the terms restricted their ability to sue.
Many large banks include arbitration clauses in their customer agreements. About 50% of outstanding credit card debt and about 44% of federally insured bank deposits are covered by those agreements, the study found.
Consumer groups have pushed the bureau to end the use of forced arbitration.
“If a company violates the law, a judge should be able to order the company to repay all of its victims and not force each person to hire their own attorney,” said Lauren Saunders, associate director of the National Consumer Law Center. “Class-action bans are a corporate get-out-of-jail-free card.”
The proposed regulations were “a tremendous step forward,” said Saunders, who expressed disappointment that arbitration still would be allowed for individual disputes.
After the March study, 58 congressional Democrats wrote to Cordray also urging him to prohibit arbitration clauses.
Financial services industry groups said arbitration lets consumers resolve disputes more quickly than going to court and helps make credit cards and other products affordable by keeping companies’ legal costs down.
“Arbitration has provided consumers the benefits of quick and easy access to an affordable dispute resolution option for nearly 90 years,” said Richard Hunt, president of the Consumer Bankers Assn. The group is “disappointed the bureau … is choosing to side with trial attorneys over the interests of consumers,” he said.
The organization joined with the American Bankers Assn. and the Financial Services Roundtable this summer warning that banning clauses that prohibit class-action lawsuits would probably lead companies to stop offering arbitration. And consumers would pay the price.
New regulations probably would “result in increased costs to consumers for financial products and services,” the groups said in a letter to Cordray.
They said the data in the bureau’s study showed that consumers who received payments through class-action settlements ended up with an average of only $32.35. Customers who won in arbitration received an average of $5,389.
The bureau should focus on educating consumers about “the many benefits that arbitration offers” rather than imposing costly new regulations, the industry groups said.
But Cordray said the study “concluded that group lawsuits can be an effective way to provide relief to consumers.”
When Congress created the bureau in 2010 as part of a sweeping financial reform law, it required a study of arbitration clauses and provided the authority to issue regulations.
Three years earlier, Congress passed legislation that prohibited arbitration clauses for certain types of loans made to members of the U.S. military.