New Financial Protection Bureau Rule Would Allow Consumers to Sue Banks

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The Consumer Financial Protection Bureau (CFPB) announced last Thursday that it plans to reinstitute certain rules that prohibit “mandatory arbitration clauses” that deny groups of consumers their day in court against financial service firms. In other words, it would allow consumers to sue banks not only individually, but also in class action lawsuits.

“Many consumer financial products like credit cards and bank accounts have contract gotchas that generally prevent consumers from joining together to sue their bank or financial company for wrongdoing,” the CFPB said in a statement.

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CFPB Director Richard Cordray added that, “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. The company can sidestep the legal system, avoid accountability, and continue to pursue profitable practices even if they violate the law and harm thousands, or even millions, of consumers.”

The announced CFPB proposal is now seeking comment on new rules to prohibit companies from putting mandatory arbitration clauses in new contracts that prevent class action lawsuits.

This comes after the Bureau conducted a study revealing that at least 160 million class members were eligible for relief over the five-year period studied. The study was part of the requirement and authority Congress assigned to the CFPB following the Dodd-Frank Wall Street Reform and Consumer Protection Act.

It is the hope of the Bureau to put the rakes on two recent Supreme Court rulings, in 2011 and 2013, that ruled such arbitration clauses were legal to employ. It was in the early part of this new century that credit card companies, and others, began applying a long dormant law that went back to 1925. It asserted that companies could use arbitration in efforts to settle disagreements prior to heading to court.

If confirmed, the ruling would take immediate affect against credit card companies, banks, and other financial services companies as it does not need the approval of Congress. It would open up the legal system to consumers so they could file a class action or join a class action when someone else files it.

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“Under the proposal, companies would still be able to include arbitration clauses in their contracts,” the CFPB states. “However, for contracts subject to the proposal, the clauses would have to say explicitly that they cannot be used to stop consumers from being part of a class action in court.”

It would additionally require financial companies to submit claims, awards, and other related materials that are filed in arbitration cases so that the CFPB can monitor the arbitration process and increase transparency by publishing certain information that would allow the public to have better insight.

A federal judge in Philadelphia, Berle Schiller, agreed with the ruling when he stated that, “It is a good start. Class actions are the only way that companies can be brought to heel.”

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