This article was last updated on April 16, 2022
The Consumer Financial Protection Bureau or CFPB, the government agency created after the 2008 financial crisis with the goal of protecting consumers from unfair corporate practices, has unveiled its latest rule that would restore the rights of customers to bring class-action lawsuits against America's financial sector. This ruling would apply to consumer loans, credit cards and bank accounts and would protect consumers from those fine print contracts that no one actually reads when they sign up for banking services. Hidden in plain view, at least for the lawyers among us, many of these contracts force consumers who wish to take action against banks that have mistreated them, are clauses that force them to go to arbitration, a method of settling a dispute that pits a single individual against a well-heeled and powerful financial firm through the use of a so-called "neutral third party" that is selected by one of the parties involved.
Let's open by looking at a example contract with an arbitration clause. In this case, the eight page contract is the Cardmember Agreement that is attached to an American Express Account:
It's not until you get to the second last page of the mind-numbing and nap-inducing contract that you find the Claims Resolution section which states the following:
"In the event Customer Service is unable to resolve a complaint to your satisfaction, this section explains how claims can be resolved through mediation, arbitration or litigation. It includes an arbitration provision. You may reject the arbitration provision by sending us written notice within 45 days after your first card purchase."
You or we may elect to resolve any claim by individual arbitration. Claims are decided by a neutral arbitrator. If arbitration is chosen by any party, neither you nor we will have the right to litigate that claim in court or have a jury trial on that claim. Further, you and we will not have the right to participate in a representative capacity or as a member of any class pertaining to any claim subject to arbitration." (my bold)
In this case, unless you notify American Express of your wishes to reject arbitration within forty-five days of your first card purchase, it is most likely that American Express will choose the arbitration route to settle a dispute because it pits a corporate giant and their legal team against a single individual. As well, the arbitration route eliminates the possibility of a class action suit under this part of the contract:
"If either party elects to resolve a claim by arbitration, that claim will be arbitrated on an individual basis. There will be no right or authority for any claims to be arbitrated on a class action basis or on bases involved claims brought in a purported representative capacity on behalf of the general public, other card members or other persons similarly situated."
This is but one example of an arbitration clause, a tactic used by a large number of American financial firms to bully their stakeholders into submission. Obviously, the financial sector is counting on individual consumers to drop their claims once it becomes apparent that they haven't got the "legal muscle" to pursue justice on their own.
Let's look at how this process could change. The proposal by the CFPB would see the following two key changes:
1.) The proposal "…would prohibit providers from using a pre-dispute arbitration agreement to block consumer class actions in court and would require providers to insert language into their arbitration agreements reflecting this limitation. This proposal is based on the Bureau’s preliminary findings – which are consistent with the Study – that pre-dispute arbitration agreements are being widely used to prevent consumers from seeking relief from legal violations on a class basis, and that consumers rarely file individual lawsuits or arbitration cases to obtain such relief."
2.) The proposal would also "…require providers that use pre-dispute arbitration agreements to submit certain records relating to arbitral proceedings to the Bureau. The Bureau intends to use the information it collects to continue monitoring arbitral proceedings to determine whether there are developments that raise consumer protection concerns that may warrant further Bureau action. The Bureau intends to publish these materials on its website in some form, with appropriate redactions or aggregation as warranted, to provide greater transparency into the arbitration of consumer disputes."
The CFPB proposal would apply to providers of certain consumer financial products and services including lending, storing, moving and exchanging money. It would also apply to companies that extend or broker automobile leases, provide services to assist with debt management or settlement, provide a consumer credit report or collect debt arising from any of the above products or services. The proposed rule would only apply to agreements entered into after the end of the 180-day period beginning on the regulation's effective date. It is also important to keep in mind that the rule changes will only apply to consumer financial companies that the CFPB regulates and does not include arbitration clauses that are inserted into contracts for car rentals, cell phones etcetera.
There is a 90 day period for comments from the public. All comments will become part of the public record and will be subject to public disclosure. If you wish to comment on this issue, you can do so at electronically at https://www.regulations.gov/#!home or by email at FederalRegisterComments@cfpb.gov including Docket No. CFPB-2016-0020 in the subject line. Since the changes do not require Congressional approval where most of the membership is beholden to the financial sector in one form or another, there is a far greater chance that the CFPB recommendations will actually take place and that consumers will have a better chance of beating the banks and other members of the financial sector at their own game.
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