A Boon for Consumers and a Blow to Wall Street

In a potential blow to Wall Street, the Consumer Financial Protection Bureau (CFBP) is proposing legislation which prohibits mandatory arbitration clauses and allows consumers to bring class actions against financial firms. The proposed rule – which applies to bank accounts, credit cards and other types of consumer loans, appears to be imminent – as it does not need congressional approval.

According to a recent piece in the New York Times, the new law could unravel a set of legal maneuvers devised by corporations that prevented customers from challenging potential deceitful banking practices. Read More.

The CFPB reports that many consumer financial products – like credit cards and bank accounts – have been able to devise contract “gotchas” that ultimately prevent consumers from pooling their resources and forming class action to sue their bank or financial company for wrongdoing. These widely used clauses leave consumers with no choice but to seek relief on their own – usually over small amounts. Because of these clauses, 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.

“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,” said CFPB Director Richard Cordray. “Many banks and financial companies avoid accountability by putting arbitration clauses in their contracts that block groups of their customers from suing them. Our proposal seeks comment on whether to ban this contract gotcha that effectively denies groups of consumers the right to seek justice and relief for wrongdoing.”

According to the CFPB, mandatory arbitration clauses have impacted hundreds of millions of consumer contracts.

Following the U.S. Supreme Court’s 2011 decision in AT&T Mobility v. Concepcion, which effectively allowed companies to wipe out class action lawsuits with one inconspicuous paragraph, Corporate America stampeded to cram mandatory arbitration clauses in every conceivable transaction – ultimately pushing consumers out of court and into arbitration. Read More.

Without the ability to pool their resources, most people abandon their claims and never make it to arbitration.  A recent CFPB study revealed  that very few consumers ever bring – or think about bringing – individual actions against their financial service providers either in court or in arbitration. The study found that class actions provide a more effective means for consumers to challenge problematic practices by these companies

The complete CFPB proposal can be viewed here. View PDF.