Customers Could File Class Action Lawsuits Against Banks Under Proposed Rule
The proposed rule would prohibit banks from banning class action lawsuits.
— -- A U.S. government watchdog consumer group is inviting public comment on a rule it proposed today that would give consumers the right to file class action lawsuits against banks and other financial firms.
The Consumer Financial Protection Bureau (CFPB), an agency created after the 2008 financial crisis, proposed a rule limiting forced arbitration clauses that typically state that disputes between the company and the consumer must be resolved by privately appointed individuals, or arbitrators. These are often found in the fine print of banks' terms.
Congress already prohibits arbitration agreements in the residential mortgage market, but this proposed rule would apply to “core” consumer businesses that lend, store or exchange money, the CFPB said, including contracts for banks, credit cards and student loans.
Consumer groups like the National Consumer Law Center applauded the CFPB's proposal.
“Forced arbitration is a get-out-of-jail-free card that lets banks, payday lenders, and debt relief scammers avoid accountability when they violate the law,” Lauren Saunders, associate director of the National Consumer Law Center, said in a statement.
The American Bankers Association (ABA), a trade group, expressed its disapproval of the proposed rule.
“Consumers will get less and pay more if the CFPB’s proposal to sideline arbitration and promote class actions is ultimately adopted," Rob Nichols, ABA president and CEO, said in a statement. "Banks resolve the overwhelming majority of disputes quickly and amicably. When needed, arbitration is an efficient, fair and low-cost method of resolving disputes in a fraction of the time — and at a fraction of the cost — of expensive litigation."
Individuals have 90 days to submit a comment on the CFPB website. If the CFPB issues the final rule in consultation with the White House Office of Management and Budget, it would be effective in 210 days from the date it’s published by the Office of the Federal Register.
The CFPB was created under the Dodd-Frank Wall Street Reform and Consumer Protection Act to shield consumers from unfair or abusive practices.
While the proposal prohibits banning class action lawsuits, companies can still force arbitration in individual cases. But the proposed rule requires companies to notify the CFPB of any arbitration claims as well as any awards issued in arbitration so that the CFPB can study their impact.
The proposal only applies to consumer financial services in the CFPB's jurisdiction. Saunders urged Congress to pass the Arbitration Fairness Act, which Sen. Al Franken, D-Minnesota, introduced last year and would give consumers the right to sue in other areas.
Joanne Doroshow, executive director of the Center for Justice & Democracy at New York Law School, said class actions are “critical” for holding companies accountable in court.
“What’s more, class actions are the only way to get injunctive relief to stop illegal behavior,” she said. “Individual arbitration can never do that.”