Consumer watchdog proposes ban on some arbitration clauses

NEW YORK (AP) — If government regulators get their way, it’s going to become a lot easier to sue your bank.

By and large, U.S. bank customers have signed away their right to sue their bank in court, often without being aware of it. Buried in the fine print of credit card agreements, mortgages, insurance policies are what are known as binding, or mandatory, arbitration clauses. It means customers are generally required to take any disputes with a bank to a third-party mediator instead of going to court.

The nation’s top consumer financial regulator wants to put a stop to that. The Consumer Financial Protection Bureau proposed a rule Thursday that would ban arbitration clauses, which would affect the entire financial industry and the hundreds of millions of bank accounts, credit cards and mortgages that Americans use.

The CFPB’s proposal does have a significant limitation. The ban would only apply when consumers want to create or join a class-action lawsuit. Financial companies will still be able to force individuals to settle disputes through arbitration; however cases where a lone customer wants to sue his or her bank are far less common.

“Many banks and financial companies avoid accountability by putting arbitration clauses in their contracts that block groups of their customers from suing them … (and) effectively denies groups of consumers the right to seek justice and relief for wrongdoing,” said CFPB Director Richard Cordray in prepared remarks.

Under current rules, if a customer has a complaint over disputed charges or a particular practice a bank uses, they’re required to go through a binding arbitration process. Consumer advocates say these arbitrators are often biased and routinely rule against consumers. If a customer loses an arbitration ruling, oftentimes it cannot be appealed.

The financial industry has argued that arbitration is more efficient way for customers to resolve disputes with banks. For the most part, they are correct, and many disputes are resolved outside of the formal arbitration process.

A study commissioned by the CFPB in March 2015 showed customers rarely used the courts to sue their bank for a small claim. However, when large numbers of customers were negatively impacted by the same issue, the same study showed arbitration clauses hinder the ability for customers to seek relief.

Critics of the CFPB’s ban say the proposal will only benefit class-action lawyers and lead to gigantic paydays.

“The CFPB is proposing to give the biggest gift to plaintiffs’ lawyers in a half century,” said Lisa Rickard and David Hirschmann of the U.S. Chamber of Commerce, in a prepared statement.

Congress directed the CFPB to study the issue of mandatory arbitration under the Dodd-Frank financial regulatory law. The CFPB announced an outline of its proposal in October, but had not laid out the exact details of what it planned to do.

Once the rules are published, the public will have the usual 90-day period to comment on the CFPB’s proposal.

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