Few Americans bother reading the fine-print legalese that accompanies credit card applications, banking services or other routine personal finance or business transactions. And many have later discovered, to their surprise and chagrin, that, by approving a contract, they forfeited a right to join with others in legal action against companies’ misconduct.
For years, certain types of lenders have included terms in their contracts to prevent borrowers from banding together in court lawsuits, requiring them to enter into arbitration, where the customers must battle powerful companies on their own.
Last week, the Consumer Financial Protection Bureau, a U.S. government agency charged with protecting consumers of financial services, proposed a rule that would restore customers’ rights to bring class-action lawsuits against banks and credit card companies, giving Americans major new protections, by undermining a complex set of corporate legal maneuvers that currently prevent financial institutions’ customers from creating class action suits to challenge what they consider deceitful banking practices.
While individual customers are not prevented from using courts to challenge a banking practice, most people who have brought suits as individuals, without the ability to pool resources with others with similar experiences, have ended up abandoning their claims. Without the ability to band with others who have experienced the same or similar injuries caused by the same product or action — most people abandon their claims and never make it to arbitration.
Among attempted class actions that were prevented by arbitration clauses was a case brought by Citibank customers, who accused the bank of fooling them into buying insurance that they didn’t need. Another, against American Express, was brought by a group of merchants who challenged the company’s high processing fees.
Although tens of millions of Americans’ financial contracts include arbitration clauses, a yearlong investigation by the New York Times found that from 2010 to 2014, only 505 consumers went to arbitration over disputes of $2,500 or less. In 2010 and 2011, businesses won $2.8 million in arbitration judgments against consumers; the 78 cases where consumers prevailed resulted in less than $400,000 in total relief.
The CFPB already prohibits mandatory arbitration of disputes related to most mortgage and home-equity loans, and for transactions involving military service members using payday loans, vehicle title loans and similar products. The proposed rule would extend that prohibition to bank accounts, credit cards and other types of consumer loans.
The new rules would mean that banks and credit card companies can no longer force people to agree to mandatory arbitration clauses that bar class actions when those customers sign up for financial products. The changes would not apply to existing accounts, but consumers will be free to pay off their old loans and open new accounts, which will be covered by the rule.
Predictably, banks and credit card companies are not celebrating the proposed rule. One of the engineers of the arbitration clauses such institutions have used, Philadelphia lawyer Alan S. Kaplinsky, warns that permitting class-action lawsuits against them “will lead to a huge upsurge in litigation and take away a benefit to consumers.” He claims that arbitration is a more expedient way to resolve disputes. Class actions, he and other bank representatives say, are primarily a boon to plaintiffs’ lawyers. The U.S. Chamber of Commerce likewise opposes the rule, calling it a “wolf in sheep’s clothing.”
Some law professors, though, argue that no wolf is hiding here, because class actions, by their very nature, are meant to help large groups of people recoup small amounts of money — overdraft or late fees, for examples — amounts that few if any individuals would undertake to litigate before an arbitration panel.
What is more, they note, class actions can force companies to change their business practices, preventing future misconduct.
There is no way to know for certain the entire impact the new rule, if enacted, will have on the industry or consumers. But common sense supports the proposition that providing an additional avenue for consumers to press their cases is fair and reasonable. And the fact that banks and credit card companies have carefully written their contracts to prevent class action suits lends credence to the claim that forcing borrowers into arbitration is a boon to the banks, not to their customers.
There will be a 90-day public comment period to garner reaction to the proposed rule, which will need to be reviewed by the Office of Management and Budget before it can go into effect. But the rule does not require congressional approval, and is expected to pass muster.
As well it should.