For years now, consumers who use practically any type of financial product, including credit cards, have been unable to file a class action lawsuit against those financial institutions. Instead, consumers have been forced to use arbitration to settle any type of alleged misconduct on the part of the financial institution. Arbitration clauses are generally tucked away in the fine print of contracts customers typically sign when opening an account or making a purchase.

In fact, the majority of consumers probably don’t even realize they have given up the right to file a class action lawsuit until an issue arises. Under the proposed rules, however, while arbitration clauses would not be entirely eliminated, those clauses would not be able to be used to prevent consumers from joining in a class action lawsuit.

Banking Institutions Fiercely Oppose Proposed Rule

The proposed rules were, predictably, met with fierce opposition from financial groups. The U.S. Chamber of Congress even called the proposed rule a “wolf in sheep’s clothing,” saying the very agency which is charged with protecting American consumers were trying to pass a rule which would actually hurt them. According to Richard Cordray, director of the Consumer Financial Protection Bureau, these financial groups are simply attempting to avoid accountability.

Rob Nichols, president of the American Bankers Association, argues the new rules will only increase legal costs, and result in frivolous class actions suits in which attorneys will make more money than the consumers. The proposed rules do not require congressional approval, and it is unclear whether industry groups will be able to block the required rules.

The Problems Associated with the Arbitration Process

The CFPB estimates that currently tens of millions of consumers are subject to arbitration clauses, yet fewer than 25 percent of those consumers are aware of the clauses. When class action lawsuits are banned, consumers are much less likely to challenge companies in court. Many critics of the arbitration process say the process is far from fair, and that arbitrators who decide the cases could have a financial incentive to side with the corporations who hire them.

Arbiters have no requirement to consider the facts of preceding cases or to even follow the law when making decisions in an arbitration, plus consumers are given little to no opportunity to appeal an adverse decision. At this point, it is difficult to know whether consumers or corporations will come out ahead, should the proposed rules be implemented, primarily because the outcome of most arbitration cases are private, with consumers required to sign confidentiality agreements.

Mandatory Reporting of Arbitration Results Proposed

The CFPB is also hoping to bring transparency to the entire process by requiring companies to report arbitration results to the agency. If the CFPB is able to make reporting arbitration reports mandatory, regulators and consumer groups would have an easier time spotting issues which could potentially be harmful to consumers. Payday loan businesses, credit card companies and credit unions, and banks would all be bound by these proposed rules. Unfortunately, the protections afforded consumers would apply only to new accounts after the rules go into effect, rather than existing accounts. Before a final draft of the rule can be reviewed by the Office of Management and Budget, there will be 90 days in which feedback will be collected.

Few Consumers Pursue Legal Action

By all accounts, class action lawsuits, rather than arbitration, have more benefit to consumers who normally would not pursue legal action for a relatively small amount of money. A CFPB survey, done in 2015, found that only 2 percent of all consumers would pursue legal action as a method of resolving small disputes. To back this up, only 505 consumers made the decision to enter arbitration over disputes less than $2,500 between 2010 and 2014.

Contact Our National Consumer Protection Lawyers

Contact the national consumer protection lawyers at Golomb & Honik, P.C. today at (215) 278-4449 or fill out an online Contact Form. We have successfully fought credit card companies, banks, and financial institutions and protected consumer rights for decades. Call us today for a review of your case.