The U.S. Consumer Financial Protection Bureau adopted a new rule yesterday that will prohibit financial firms from forcing customers into mandatory arbitration in disputes over credit cards and bank accounts.
The rule will allow consumers to band together into class action lawsuits that could end in billion-dollar payouts against law-breaking banks.
The rule will likely face a pushback from the Trump administration and House Republicans before it goes into effect next year, as both have promised to lighten regulation on the financial industry.
Even so, mandatory arbitration clauses are immensely unpopular with ordinary Americans because they allow banks to force individuals into private arbitration, stripping them of their right to join a class action.
Unlike class action lawsuits, private arbitration is a secretive process in which individuals must go up on their own against powerful banks with deep pockets. Not surprisingly, consumers rarely try — or win.
According to the CFPB:
Companies use arbitration clauses to block you from joining to together to sue and seek justice. By forcing people to go it alone or give up, companies can avoid accountability and continue to harm people.”
For example, long before Wells Fargo & Co. admitted to opening millions of unauthorized accounts so they could charge illegal fees, consumers noticed the bank’s practices and tried to file a class action. Wells Fargo successfully had the lawsuit tossed out because the arbitration agreements made it nearly impossible for consumers to sue them.
Since the mid-2000s, private arbitration has become standard practice for banks — but few consumers realize they are signing away their right to file a class action lawsuit against their bank when they apply for a credit card or open a savings account.
This is because arbitration clauses are usually buried at the bottom of the contracts in hard-to-read fine print that most consumers do not read anyway. And banks are not the only ones on the bandwagon. Today, it is virtually impossible to rent a car, buy cable or internet service, or even shop online without agreeing to private arbitration.
Banning financial institutions from using mandatory arbitration agreements has been a signature effort of the CFPB, an agency that was created after bank bailouts in 2010 under Dodd-Frank. The rule is the first significant blow to arbitration since two Supreme Court rulings in 2011 and 2013 destroyed decades of legal protections for workers and consumers.