For years, consumers wanting to open a credit card or use almost any kind of financial product have often had to give up their right to sue the company — usually as a condition of doing business.
But new rules proposed Thursday by the Consumer Financial Protection Bureau could change that.
The long-awaited proposal would target arbitration clauses, agreements that are typically tucked into the fine print of contracts that consumers need to agree to before opening accounts or buying a product.
The little-known clauses often bar customers from participating in class action lawsuits, steering them instead into a private process known as arbitration. Many consumers may not realize until much later, after an issue has come up, that they've given up the right to sue, consumer advocates say.
But under the rules proposed by the CFPB, which don't eliminate arbitration clauses completely, consumer financial companies would no longer be able to use arbitration clauses that ban customers from taking part in class action suits. The proposed changes would also make it easier to know how consumers fare when they go into arbitration with a company.
"Many banks and financial companies avoid accountability by putting arbitration clauses in their contracts that block groups of their customers from suing them," Richard Cordray, director of the Consumer Financial Protection Bureau, said in a statement.
The CFPB estimates that tens of millions of consumers are subject to arbitration clauses. But despite their widespread use, 75 percent of consumers don't know if they are subject to an arbitration clause, according to a report released last year by the agency.
Consumer advocates say that few people end up challenging companies in arbitration or in small claims court, the two main avenues available for seeking relief when class action suits are not an option. That is especially true for disputes over small dollar amounts.
In those cases, the amount of money lost can seem minor when compared to the hundreds or thousands of dollars it might cost to file an individual lawsuit or to submit a claim in small claims court, said Thaddeus King, an officer with Pew Charitable Trusts' consumer banking project.
Critics of the process say that the arbitrators who decide the cases may have a financial incentive to side with the corporations that hire them to resolve the disputes. Meanwhile supporters of arbitration say consumers may often earn more through arbitration than they would through a class action lawsuit.
But in reality, it's difficult to know if any one side — the consumer or the corporation — is more likely to come out ahead. The outcomes of most arbitration cases are kept private, with consumers having to sign confidentiality agreements.
The CFPB hopes to shed light on the process by requiring companies to report the results of arbitration cases to the agency. Tracking those outcomes should make it easier for regulators and consumer groups to spot bias and other trends that may be harmful to consumers, the agency said.
Still, some financial institutions and industry groups that support arbitration say that rules limiting lawsuits can help consumers by cutting down on legal costs. Some also argue that class action lawsuits can lead to a bigger payout for lawyers than they do for participants, who sometimes receive minor payments. "Consumers will get less and pay more if the CFPB's proposal to sideline arbitration and promote class actions is ultimately adopted," Rob Nichols, president of the American Bankers Association said in a statement.
Now that the rule has been proposed, the bureau will launch a 90 day comment period. That feedback will be incorporated into the final version of the rule, which would need to be reviewed by the Office of Management and Budget before it can go into effect.
Read more:
Why it's nearly impossible for you to sue your credit card company
What happens when consumers are banned from class action lawsuits
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Jonnelle Marte is a reporter covering personal finance. She was previously a writer for MarketWatch and the Wall Street Journal.
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