New CFPB Rule Bans Companies from Using Arbitration Clauses to Prevent Consumer Lawsuits
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New CFPB Rule Bans Companies from Using Arbitration Clauses to Prevent Consumer Lawsuits

The clauses blocked consumers from suing over financial companies’ wrongdoing

July 11, 2017

The Consumer Financial Protection Bureau (CFPB) has announced a new rule banning companies from using mandatory arbitration clauses to prevent consumers from suing over the companies' wrongdoing.

Protecting Consumer Rights

Many financial products targeted at consumers, such as credit cards and bank accounts, include arbitration clauses in their contracts preventing joint lawsuits against the bank or company for wrongdoing. This practice forces victims to either give up on suing or to sue by themselves, usually for small amounts. The result is that the companies are able to work around the court system, avoid having to pay out large refunds, and continue their wrongdoing.

The new rule will discourage wrongdoing by giving consumers back their right to join together in group lawsuits.

"Arbitration clauses in contracts for products like bank accounts and credit cards make it nearly impossible for people to take companies to court when things go wrong," said CFPB Director Richard Cordray. "These clauses allow companies to avoid accountability by blocking group lawsuits and forcing people to go it alone or give up. Our new rule will stop companies from sidestepping the courts and ensure that people who are harmed together can take action together."

Mandatory Arbitration Clauses

Mandatory arbitration clauses are present in hundreds of millions of contracts for consumer financial products and services. Typically, these clauses state that—except for individual cases brought in small claims court—either the company or the consumer is allowed to require disputes to be resolved by arbitrators. Though these clauses can be used to block any type of lawsuit, they are used almost only to block group lawsuits, known as "class action" suits.

In group lawsuits, a few consumers can seek relief on behalf of all the consumers who have been harmed by a company's wrongdoing. Nearly all mandatory arbitration clauses force consumers to pursue an individual claim against the company regardless of the number of consumers injured by the company's wrongdoing. Consumers rarely spend the time or money to pursue such claims when the amounts in question are small.

The Rule

The CFPB's rule is based on two premises: that companies are less likely to engage in harmful wrongdoing when they know that consumers will hold them accountable for it, and that public attention on one company's business practices can influence not only that company's practices but also those of other companies.

The rule allows companies to continue to include arbitration clauses in their contracts, but they can't use those clauses to prevent consumers from joining together to bring a group lawsuit. Companies will also be required to submit certain records to the CFPB in order to make the individual arbitration process more transparent, including initial claims and counterclaims, answers to those claims and counterclaims, and arbitration awards. These records will have to be submitted with personal information appropriately concealed or removed.