Most consumers probably aren't aware that they've signed away their right to join class actions against their bank or credit card company.
Now, the Consumer Financial Protection Bureau wants to ban companies from including so-called arbitration clauses in their service agreements, calling them a "free pass to avoid accountability." The clauses generally require consumers to go into arbitration over a dispute, rather than to seek redress in the courts or join a group lawsuit pursuing compensation from a company that has broken the law or caused harm.
These stipulations are often embedded in the contracts that consumers agree to when they open a bank account or credit card, but customers often don't understand them or even notice them. The CFPB has been studying the clauses as part of its mandate under the Dodd-Frank Act, which also bans the use of arbitration clauses in mortgage contracts. More than half of credit card companies include such a clause in their agreement, but three out of four consumers had no idea they had agreed to it, according to the CFPB.
"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. "The proposals under consideration would ban arbitration clauses that block group lawsuits so that consumers can take companies to court to seek the relief they deserve."
Banks and credit card companies aren't the only ones using these clauses. An earlier CFPB study found that the clauses were also common in the private student loan market, where 86 percent of the largest lenders use them, and in payday loans, where almost every payday lender with storefronts in California and Texas include the clauses. Even 88 percent of the largest mobile phone service providers rely on the clauses.
Already, some financial institutions were pushing back against the proposal. The National Association of Federal Credit Unions noted in a statement that "the announcement could suggest broad, sweeping reporting requirements that may unintentionally burden credit unions."
Other industry groups have also sounded alarms. The American Bankers Association and other financial services groups said in a July letter that banning the clauses could "result in increased costs to consumers."
The financial services industry has argued that arbitration is a faster and easier way to resolve disputes than going through the courts. While that might be the case, the CFPB found that the clauses can act as a barrier to class actions and said that it found "no evidence of arbitration clauses leading to lower prices for consumers."
"The presence of such a clause means that if you want to claim financial relief from a company that has wronged you, you must proceed individually," the CFPB said on Wednesday. "That's true, no matter how small your claim and no matter how many customers may have been harmed by exactly the same wrongdoing. And even if you win your claim and receive compensation for your wrong, the company may continue the illegal and harmful behavior toward other consumers."
The proposal would make it illegal for many companies that offer consumer financial products to include clauses that bar class actions in the their contracts. The types of businesses that would be affected include banks, credit cards, some auto lenders, payday lenders and money-transfer services. The agency noted that it's not proposing to ban arbitration clauses in their entirety.
In the case of arbitration clauses that apply to individual disputes, the CFPB would require companies to submit the claims and any awards that were issued to the agency, which says it will monitor the process to make sure it's fair for consumers.