The Consumer Financial Protection Bureau recently released its proposal, which would eliminate class action bans in consumer financial contracts. This would empower consumers by giving them access to the court system to seek relief when they have been victimized by a financial practice.
You may have not even been aware of the clauses in contracts that can be hard to find in all the fine print. But often, whether you’re signing on for a credit card, payday loan or student loan, you give up the right to participate in a group lawsuit if a company breaks the law or otherwise harms you.
"The use of binding, mandatory arbitration in consumer financial contracts is widespread. These clauses require individuals harmed by companies’ practices to bring their case to arbitration forums that heavily favor the banks, credit card companies and other lenders," says Lisa Stifler, policy counsel for the Center for Responsible Lending. The clauses also ensure that groups of consumers harmed by the exact same practice are unable to make their case collectively because they prohibit the use of class action arbitration.
"Aggrieved individuals should have the right to make their case before an impartial judge and many times, doing so as a group of harmed consumers is the most effective way to obtain relief and hold bad actors accountable for unfair practices. The CFPB proposal is a helpful step in making sure the consumers can have their case heard by an impartial judge and bringing accountability to consumer financial services," says Stifler.
Consumer advocates see much promise in the proposal. "Companies used forced arbitration clauses with embedded bans on class action lawsuits to avoid complying with the law and then to avoid legal action by victimized consumers. The banks will whine because they’ve gotten used to their ‘Get Out of Jail Free’ card. If companies face lawsuits for cheating customers, they will clean up their acts. There won’t be a ton of new lawsuits, because if companies know that cheating no longer pays off," says Ed Mierzwinki, consumer program director for U.S. PIRG.
Much is at stake for financial companies, anticipate much noise from their quarters. "I would expect financial firms to lobby hard against this proposal," predicts Edgar Dworsky, founder of ConsumerWorld.org.
A good beginning
While the proposal, if finalized as written, should make a significant difference going forward, it will not affect financial services contracts already in the market, explains Stifler.
Furthermore, the proposal doesn’t address mandatory, binding arbitration for individual claims. "As studies have shown, the forums heavily favor the companies and may not be impartial. To be a true alternative forum for resolving disputes, more fairness and transparency should be brought to the process, which the CFPB should address in its final rule," she says.
Matthew Kreitzer, a creditor’s rights attorney weighs in. "This regulation is more likely to harm consumers, as opposed to having a positive impact. All this regulation is doing is increasing the cost of doing business for credit companies which is likely to be passed onto the end consumers."
He contends that credit companies will have to initiate bringing on new staff, revise contracts and agreements. "This may drive up interest rates or create new attempts by creditors to limit credit acquisition through policies related to principal floors (bare minimums) for qualifying candidates."
Due to the increased cost of doing business, he believes many small credit shops that serve rural areas will close their doors. "Many local creditors aren’t operating in the black and a surge in administrative costs could reduce the market. Although the intention is to impact large credit companies, it is more likely to make them more prevalent in rural areas, and the terms will not be as competitive," says Kreitzer.
Who knows what the final proposal will look like, but for now, says Dworsky, "This is a great move by the CFPB to prevent companies from taking unfair advantage of consumers."