Financial Institutions Can't Prohibit Class Action Suits under Proposed Rule

Suing your bank might get a little easier

Financial Institutions Can't Prohibit Class Action Suits under Proposed Rule
Image: Pixabay
May 6, 2016

Rules proposed by the Consumer Financial Protection Bureau (CFPB) would make it easier for consumers to sue banks and other financial institutions by banning contractual clauses that prohibit class action suits.

If approved, the rule would ban mandatory arbitration clauses that force customers into settling their problems with companies individually instead of with other harmed consumers. The rule would allow companies to have the option of settling disputes individually with a professional mediator, but only if class action suits are also allowed.

Mandatory arbitration clauses are so commonly used that it's quite likely that you entered into at least one when you agreed to those Terms and Conditions no one ever reads. Banking and financial institutions are hardly the only ones that use these clauses. In April, Consumerist wrote about a weight loss supplement that included a forced arbitration clause on its packaging. Just buying the supplement entered you into one of these agreements.

When the CFPB studied these clauses, they found that very few consumers ever bring – or even think about bringing – individual actions against their bank either in court or through arbitration. Even if a bank is in the wrong, the cost and hassle of going through the legal process doesn't make doing so financially or emotionally worth it. Only 2 percent of consumers with credit cards would even bother consulting an attorney or pursuing legal action as a means of resolving a small-dollar dispute.

Civil action cases, however, were found to be much more appealing and successful for consumers since it enabled sometimes hundreds of people the opportunity to get relief from a financial institution that didn't follow good business practices. Following the lawsuits, companies also had to alter their questionable conduct benefitting current and future customers.

Along with giving consumers an easier way to take their bank to court, the proposal is expected to have a deterrent effect since financial institutions could be held accountable for their misconduct.

The rules would also make the arbitration process more transparent by requiring that companies submit to the CFPB any claims filed and awards issued. This would provide more data and information about the process.

The public is invited to comment on the proposed rules. To read them in full, visit here.