Federal Regulator Considers Rule to Protect Class Action Suits Against Financial Companies

Federal Regulator Considers Rule to Protect Class Action Suits Against Financial Companies
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October 7, 2015

A federal financial regulator is considering a rule that would ban financial companies from using arbitration clauses to block consumers from bringing class action lawsuits against them.

The Consumer Financial Protection Bureau (CFPB) wants to ban clauses that deny consumers the right to participate in group lawsuits against companies. These clauses are usually buried in many contracts for consumer financial products like credit cards and bank accounts. The agency says that these clauses help companies sidestep the legal system, avoid big refunds, and continue to pursue profitable practices that may violate the law.

Many contracts for consumer financial products and services include arbitration clauses. These clauses typically state that either the company or the consumer can require disputes about that product to be resolved by privately appointed individuals (arbitrators), rather than through the court system. Where such a clause exists, either side can generally block lawsuits from proceeding in court. These clauses also typically bar consumers from bringing group claims through the arbitration process. There are arbitration clauses in all kinds of consumer financial products, from bank accounts to private student loans. They affect tens of millions of consumers. As a result, no matter how many consumers are injured by the same conduct, consumers must resolve their claims individually against the company, which few consumers do.

The proposals being considered would ban companies from including arbitration clauses that block class action lawsuits in their consumer contracts.

The proposals would not ban arbitration clauses in their entirety. The clauses would have to say explicitly that they do not apply to cases filed as class actions unless, and until, the class certification is denied by the court or the class claims are dismissed in court. The proposals under consideration would also require that companies that choose to use arbitration clauses for individual disputes submit to the CFPB the arbitration claims filed and awards issued. This will allow the Bureau to monitor consumer finance arbitrations to ensure that the process is fair for consumers. The Bureau is also considering publishing the claims and awards on its website so the public can monitor them.

The CFPB is publishing an outline of the proposals under consideration in preparation for convening a Small Business Review Panel to gather feedback from small industry stakeholders. This is the first step in the process of a potential rulemaking on this issue.

In addition to consulting with small business representatives, the Bureau will continue to seek input from the public, consumer groups, industry, and other stakeholders before continuing with the process of a rulemaking. When the Bureau issues proposed regulations, the public is invited to submit written comments which will be carefully considered before final regulations are issued.

More information about the proposal can be found on the CFPB website.