CFPB Director Richard Cordray

CFPB Director Richard Cordray

U.S. Regulator Seeks Return of Class Action Suits Against Credit Cards, Banks

A U.S. consumer watchdog on Thursday proposed new rules to block credit card companies, banks and other companies from forcing customers to waive their rights to join class action lawsuits and settle disputes only through arbitration.

The Consumer Financial Protection Bureau proposed barring financial firms from including fine print in contracts that mandates arbitration instead of a group lawsuit in the event of a dispute over products ranging from checking accounts to credit cards. The agency said the clauses prevent consumers who have been wronged from receiving justice and compensation through the courts.

U.S. businesses are expected to oppose the proposal and sue if it becomes final. They say arbitration is more efficient and helps avoid costly litigation, which they said rarely benefits the people filing suit.

"Companies simply insert these clauses into their contracts for consumer financial products or services and literally 'with the stroke of a pen' are able to block any group of consumers from filing joint lawsuits known as class actions," CFPB Director Richard Cordray said in prepared remarks.

"That is so even though class actions are widely recognized to be valid avenues to secure legal relief under federal and state law."

In class actions, people band together to sue over the same alleged wrongdoing to make the lawsuit more affordable.

In arbitration, a private individual settles a conflict. In many cases, companies select the arbitrators, the proceedings are confidential and decisions are hard to appeal.

Requiring customers to agree to "mandatory arbitration clauses" when they sign up for a product has become nearly universal since a 2011 U.S. Supreme Court decision known as AT&T Mobility vs. Concepcion validated the practice.

The CFPB will finalize its rule after a public comment period.

The chairman of the House of Representatives Financial Services Committee, Republican Jeb Hensarling of Texas, called it a "big, wet kiss to trial attorneys" and cast Cordray, who is appointed, as a "de facto dictator."

"This move - which will apply to some of the most common financial contracts including credit cards, checking accounts, and even cell phones - essentially hands over the keys of the CFPB's luxury office building to the wealthy, powerful, and politically well-connected trial lawyer lobby," he said.

Under the proposal, companies could still use arbitration clauses, but would have to state explicitly that consumers can sign onto class actions. They would also have to give the bureau information on claims filed and awards issued in their arbitrations, as well as correspondence from arbitrators regarding unpaid fees and failure to follow standards of conduct.

The CFPB said the proposal would give consumers "a day in court," have a deterrent effect for companies wanting to avoid group lawsuits and increase transparency.

The U.S. Chamber of Commerce, representing the business sector, said the proposal was a gift to plaintiffs' lawyers.

"In the 50 years since the advent of modern day class action lawsuits, plaintiffs' lawyers have made millions of dollars in fees from these suits while consumers often receive little benefit," the chamber said in a statement.

A 2015 study by the CFPB found individuals rarely sue on their own because it is too expensive.

About 6.8 million consumers receive $220 million in payments from class action settlements each year, the CFPB found, adding that the suits also "cause companies to alter their legally questionable conduct."

"Forced arbitration and class action bans force consumers into a biased, secretive, and lawless forum, preventing either a court or an arbitrator from ordering a lawbreaker to repay all of its victims," Lauren Saunders, associate director of the National Consumer Law Center, said in a statement.

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