Financial institutions, payday loan lenders and credit businesses have huge legal teams behind them. They have a lot of resources – manpower, time and money – to combat any legal woes that come up. Meanwhile, you have little resources and one lawyer to fight and represent you. Essentially, it’s very difficult to establish any legal action against these power players, particularly when you peruse the fine print in any of the documents you sign.
Well, if one federal watchdog agency has its way then all of that is about to change.
The Consumer Financial Protection Bureau (CFPB) unveiled a new proposed rule Thursday that would limit the use of arbitration clauses in various consumer financial contracts. The CFPB would restrict financial companies from using mandatory-arbitration clauses in contracts with their customers. These are utilized to prevent class-action lawsuits and put their clients into private negotiations in order to solve disputes and come up with an agreed resolution.
Experts view this as a transition of power from the financial services companies to consumers. If such a rule is put into place then it would affect a wide range of financial products, from credit cards to private student loans, from loan lenders to bank accounts.
Such clauses have become the norm in recent years, and have been supported by the legal system. And the CFPB presented data that found an enormous amount of contracts had these clauses. The CFPB released the results of a 2015 study that found the clauses were found in:
- 99 percent of payday loan contracts.
- 92 percent in prepaid card agreements.
- 86 percent of private student loan lenders.
- 53 percent of credit card issuers.
- 44 percent of banks receiving insured deposits.
This resulted in fewer consumers filing arbitration cases – about 600 filings are made each year.
“Signing up for a credit card or opening a bank account can often mean signing away your right to take the company to court if things go wrong,” said CFPB Director Richard Cordray in a statement. “Many banks and financial companies avoid accountability by putting arbitration clauses in their contracts that block groups of their customers from suing them. Our proposal seeks comment on whether to ban this contract gotcha that effectively denies groups of consumers the right to seek justice and relief for wrongdoing.”
Plaintiffs’ attorneys, supported by organizations such as the American Association for Justice, have advocated for the new rule for a very long time. They’re welcoming the news Thursday.
Other companies, however, have already started campaigns to stop the proposed rule. They argue that there would be a substantial increase business for class action attorneys. Alan Kaplinsky, head of consumer finance group Ballard Spahr, warned that consumers are going to be the losers in all of this.
“There’s only one winner coming out of this rule: the plaintiff’s class action bar,” Kaplinsky told Bloomberg News. “It’s not good for the industry, for banks or for non-banks. And consumers are going to be net losers, it’s a lousy trade.”
Even the United States Chamber of Commerce wrote in a letter to the CFPB this week, according to the Wall Street Journal, that the new proposal would get rid of a “cheaper, faster and more effective” option for consumers.
It has been suggested that the new rule would take into effect next year following a 90-day public consultation period and the drafting of the final rule.
Simply put: payday loans, financial institutions and private student loan providers beware!