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Arbitration
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Sue the Bank? You May Get Your Shot
Oct 7, 2015 | Wall Street Journal
By Yuka HayashiI
The Consumer Financial Protection Bureau is moving toward new rules giving borrowers more rights to sue banks and credit-card companies, the agency’s latest attempt to shift the balance of power to consumers from financial institutions. -
Protection Bureau Seeks End to Arbitration-Only Clauses in Consumer Contracts
Oct 7, 2015 | New York Times Dealbook
By Jessica Silver-Greenberg and Michael Corkery
To many businesses, class-action lawsuits are synonymous with ambulance-chasing lawyers extracting multibillion-dollar settlements. They have been called frivolous and are faulted for swelling the legal costs of Wall Street banks and Main Street auto lenders. For years, financial firms have tried to ward them off by requiring customers to agree not to file class-action suits, but to take their disputes to arbitration instead. Now, the nation’s consumer watchdog agency — the Consumer Financial Protection Bureau — is aiming to reopen the courthouse doors for the tens of millions of people who have signed away their right to sue. -
Agency targets the fine print preventing customers from joining class actions
Oct 7, 2015 | LA Times
By Jim Puzzanghera
The end could be near for those hard-to-understand clauses buried in the fine print of credit card, checking account and other financial agreements that force consumers to take disputes to arbitration — rather than to court. -
CFPB may let you sue your bank instead of going to arbitration
Oct 7, 2015 | USA Today
By Kevin McCoy
The Consumer Financial Protection Bureau is weighing potential rules that would ban financial firms from using arbitration clauses to block customers from pursuing group lawsuits to win relief in disputes. -
Feds May Order Financial Firms To Allow Class Action Lawsuits
Oct 7, 2015 | NPR
By Chris Arnold
New federal rules could be in the works to make it easier once again for Americans to seek relief through class action lawsuits. That's the latest word out just this morning from the Consumer Financial Protection Bureau. -
Most Arbitration Clauses Could Be Banned from Bank Contracts
Oct 7, 2015 | Reuters
Banks and credit card companies may not force customers to sign away their legal rights to take part in class-action lawsuits, under an early-stage U.S. government proposal that is likely to draw ire from Wall Street. -
Financial regulators move to restrict forced arbitration
| Associated Press
By Ken Sweet
Suing your bank or debt collector might be getting a whole lot easier. The Consumer Financial Protection Bureau is considering new regulations that would severely curtail a contentious practice called mandatory arbitration, which is when consumers are forced to take their disputes to a third-party mediator instead of a court of law. -
CFPB Weighs Axing Class Action Bans In Arbitration Clauses
| Law360
By Evan Weinberger
The Consumer Financial Protection Bureau on Wednesday said it is working on a proposal that would stop companies from including clauses that block consumers from filing class action lawsuits in their arbitration clauses. -
CFPB may ban arbitration clauses in financial service contracts
Oct 7, 2015 | Consumer Affairs
By Truman Lewis
Arbitration clauses are often presented as protecting consumers from the necessity of going to court to settle disputes. But in reality, forced arbitration strips consumers of the right to sue individually and as part of a class action. -
Consumer bureau: No language blocking class-action suits
| The Hill
By Peter Schroeder
A top financial regulator announced Wednesday it was considering barring a common move by financial companies to limit customers’ legal options. -
CFPB To Consider Rules That Would Revoke Banks’ “License To Steal”
| Consumerist
By Chris Morran
The lengthy, often complicated terms of use for more than half of all credit cards — and nearly half of all federally insured bank deposits — include clauses that force customers into arbitration, taking away their right to sue these companies in a court of law and usually blocking them from joining together in a class action.
Mainstream Media
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Sue the Bank? You May Get Your Shot
Oct 7, 2015 | Wall Street Journal
By Yuka HayashiI
The Consumer Financial Protection Bureau is moving toward new rules giving borrowers more rights to sue banks and credit-card companies, the agency’s latest attempt to shift the balance of power to consumers from financial institutions.
The CFPB is set Wednesday to propose rules that curb mandatory arbitration. The plan throws the new federal agency into the center of a national debate over whether consumers are helped or harmed by arbitration agreements that block class-action lawsuits. Such clauses are common for a range of products and services such as mobile phones, home mortgages and nursing homes.
The proposals under consideration would ban companies from including arbitration clauses that block class-action lawsuits in their consumer contracts for a broad range of financial products including credit cards, checking and deposit accounts, prepaid cards, money transfer services, certain auto loans, payday loans and private student loans.
After publishing the proposals Wednesday, the agency will convene a panel of small businesses to gather feedback. A formal proposal of the rule will follow later in the year, kicking off a public comment period. It is unclear when a final rule would likely take effect.
Financial-industry executives and some lawmakers are poised to fight the proposals, arguing that arbitration provides faster and more cost-effective dispute resolution for many consumers.
The concept behind class-action suits, combining many small claims, “is a good, practical idea,” said Stephen Ware, a law professor at the University of Kansas who looks at arbitration. “On the other hand, what actually happens in consumer class-action litigation is it often has a lot of costs to businesses and doesn’t seem to yield much benefit to consumers at least in terms of payout.”
The use of arbitration clauses in consumer contracts is widespread, particularly following a string of Supreme Court decisions finding that federal policy favoring arbitration clauses pre-empts state laws giving consumers the right to file lawsuits.
According to a study conducted by the CFPB in March to justify the pending regulations challenging the high court’s directive, “tens of millions of consumers” are affected by mandatory arbitration clauses. That includes 53% of the credit-card market, 44% of the checking-account market, and virtually all payday loan and mobile wireless customers.
Amid criticism that such clauses hurt consumers at the expense of companies, lawmakers and regulators have taken steps toward reversing the trend. The Centers for Medicare and Medicaid Services proposed in July a new rule that imposes tougher requirements on arbitration agreements that nursing homes sign with residents upon their admission.
And the 2010 Dodd-Frank financial-overhaul law that created the CFPB gave it a long list of widespread financial business practices to review, among them the use of arbitration clauses in consumer financial markets, and granted it the power to issue regulations based on its findings.
Advocates of the new rules say Dodd-Frank signals that Congress intended to keep the legal channel open to consumers. As such, they argue, it supersedes Congress’s intent in the 1925 Federal Arbitration Act, which has largely been the basis of the Supreme Court rulings favoring arbitration over lawsuits.
In a news release, the CFPB said that most arbitration clauses, placed in the fine print of contracts for products such as credit cards and bank deposit accounts, deny consumers the right to participate in group lawsuits against companies.
The CFPB said in its March study on the use of arbitration clauses that three in four credit-card holders surveyed didn’t know whether they were subject to an arbitration clause in their contract. Only 7% of those consumers covered by arbitration clauses were aware that the clauses restricted their ability to sue in court, the CFPB said in the 728-page report.
The CFPB’s review of arbitration clauses is the bureau’s latest in a series of moves intended to curb the power and discretion of the financial industry, a campaign that has made the young agency a target of criticism from financial-services providers and conservative lawmakers, while being lauded by consumer advocates and liberal politicians.
The bureau, headed by director Richard Cordray, has imposed tougher new limits on the mortgage and auto loan markets. In the coming months, it plans to move ahead with drafting rules for such areas as payday lending, bank overdraft fees, and debt collection.
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Protection Bureau Seeks End to Arbitration-Only Clauses in Consumer Contracts
Oct 7, 2015 | New York Times Dealbook
By Jessica Silver-Greenberg and Michael Corkery
To many businesses, class-action lawsuits are synonymous with ambulance-chasing lawyers extracting multibillion-dollar settlements. They have been called frivolous and are faulted for swelling the legal costs of Wall Street banks and Main Street auto lenders.
For years, financial firms have tried to ward them off by requiring customers to agree not to file class-action suits, but to take their disputes to arbitration instead.
Now, the nation’s consumer watchdog agency — the Consumer Financial Protection Bureau — is aiming to reopen the courthouse doors for the tens of millions of people who have signed away their right to sue.
On Wednesday, the agency is set to propose the rough draft of rules that would prevent financial companies from barring their customers from filing class-action litigation as a condition of obtaining credit cards or checking accounts.
“Companies are using the arbitration clause as a free pass to sidestep the courts and avoid accountability for wrongdoing,” Richard Cordray, director of the bureau, said in a statement.
The proposal is likely to face stiff opposition from the U.S. Chamber of Commerce, which has argued that class actions pad plaintiff lawyers’ pockets while delivering little relief to consumers.
The preliminary rules are the culmination of a multiyear study that examined the use of arbitration clauses in consumer contracts and the outcomes of class actions.
In this highly charged debate, the consumer protection agency tried to broadly calculate the monetary relief that class actions yielded.
It found that in a five-year period, class-action settlements produced $2.7 billion in cash relief for 160 million Americans, with 18 percent being used to pay the plaintiffs’ lawyers.
Without the benefit of a class action — which allows consumers to pool their resources in pursuing a costly legal claim — most consumers cannot afford to challenge companies with deep pockets.
Still, business groups say arbitration offers a more efficient but equally fair means for consumers to resolve complaints. These private proceedings, held outside court, provide the same opportunity for relief without the staggering legal bills, the groups say.
The agency disagreed. The study showed that relatively few people ever make it to arbitration. When they do, the agency found, their payouts were limited.
In fact, business got bigger judgments against consumers — $2.8 million in 2010 and 2011, largely for debt payments — than the consumers obtained in relief, according to the agency’s analysis of arbitration claims filed with the American Arbitration Association, which handles the bulk of arbitrations involving consumers.
During that period, only 78 arbitration claims resulted in judgments in favor of consumers, who received less than $400,000 in total relief.
The financial industry counters that on an individual basis, consumers fare better in arbitration. On average, awards in arbitration are 166 times as great as the sums received by individuals participating in a class action, according to a July letter from industry groups commenting on the agency study.
Under the rules, financial companies would not be allowed to explicitly prevent consumers from forming a class. Companies would still be able to use arbitration to resolve disputes.
If they go through with arbitration, companies would have to submit the results of the proceedings to the consumer protection agency under the rules. Today, no federal agency collects data on how consumers fare in arbitration. More than half of all credit card agreements and nearly 90 percent of private student loans contain arbitration clauses, according to the agency’s study, which was released in March.
The unveiling of the preliminary rules — which is expected at a hearing in Colorado organized by the consumer protection agency — is only the first step in what could prove to be a protracted battle. A comment period is to follow, in which the rules will be presented to a panel of small-business owners.
Arbitration was among the topics that the bureau was asked to address when it was created as a result of the Dodd-Frank reform law in 2010 in the aftermath of the financial crisis.
Since then, the bureau has faced a barrage of attacks, mostly from congressional Republicans, who have tried to rein in the nascent agency or have called for it to be dismantled. The battle over the class-action rules could prove to be one of its toughest challenges yet.
Previous efforts in Congress to limit the use of arbitration clauses in consumer contracts have gained little traction. In April, Senator Al Franken, Democrat of Minnesota, reintroduced a bill that would eliminate mandatory arbitration clauses from consumer and other contracts. The proposed legislation, which is still pending, followed the defeat of a bipartisan bill that would have allowed members of the military to opt out of arbitration.
F. Paul Bland Jr., executive director of the group Public Justice, hailed the proposal as “an enormous step toward protecting consumers.”
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Agency targets the fine print preventing customers from joining class actions
Oct 7, 2015 | LA Times
By Jim Puzzanghera
The end could be near for those hard-to-understand clauses buried in the fine print of credit card, checking account and other financial agreements that force consumers to take disputes to arbitration — rather than to court.
The Consumer Financial Protection Bureau said Wednesday that it was considering sweeping new regulations that would ban arbitration clauses that block customers from joining class-action lawsuits.
"Consumers should not be asked to sign away their legal rights when they open a banking account or credit card," said Richard Cordray, the bureau's director. "Companies are using the arbitration clause as a free pass to sidestep the courts and avoid accountability for wrongdoing."
The move could all but eliminate the common practice of requiring forced arbitration for consumer financial products and would face stiff opposition from big banking interests, which have argued that it helps keep costs down.
Companies still could require that individual disputes be heard by private arbitrators, the bureau said. But financial services firms would have to submit detailed information on claims and financial awards to regulators so the data could be analyzed and made public on the bureau's website.
The bureau is launching a formal rule-making process for the new regulations, which would also apply to payday loans, prepaid debit cards and private student loans. Cordray is scheduled to hold a hearing on the issue in Denver on Wednesday.
In a study released in March, the bureau found that more than 75% of consumers didn't know if they were subject to an arbitration clause for their credit cards and other financial services. And less than 7% of those covered by the provisions knew that the terms restricted their ability to sue.
Many large banks include arbitration clauses in their customer agreements. About 50% of outstanding credit card debt and about 44% of federally insured bank deposits are covered by those agreements, the study found.
Consumer groups have pushed the bureau to end the use of forced arbitration.
"If a company violates the law, a judge should be able to order the company to repay all of its victims and not force each person to hire their own attorney," said Lauren Saunders, associate director of the National Consumer Law Center. "Class-action bans are a corporate get-out-of-jail-free card."
The proposed regulations were "a tremendous step forward," said Saunders, who expressed disappointment that arbitration still would be allowed for individual disputes.
After the March study, 58 congressional Democrats wrote to Cordray also urging him to prohibit arbitration clauses.
Financial services industry groups said arbitration lets consumers resolve disputes more quickly than going to court and helps make credit cards and other products affordable by keeping companies' legal costs down.
"Arbitration has provided consumers the benefits of quick and easy access to an affordable dispute resolution option for nearly 90 years," said Richard Hunt, president of the Consumer Bankers Assn. The group is "disappointed the bureau … is choosing to side with trial attorneys over the interests of consumers," he said.
The organization joined with the American Bankers Assn. and the Financial Services Roundtable this summer warning that banning clauses that prohibit class-action lawsuits would probably lead companies to stop offering arbitration. And consumers would pay the price.
New regulations probably would "result in increased costs to consumers for financial products and services," the groups said in a letter to Cordray.
They said the data in the bureau's study showed that consumers who received payments through class-action settlements ended up with an average of only $32.35. Customers who won in arbitration received an average of $5,389.
The bureau should focus on educating consumers about "the many benefits that arbitration offers" rather than imposing costly new regulations, the industry groups said.
But Cordray said the study "concluded that group lawsuits can be an effective way to provide relief to consumers."
When Congress created the bureau in 2010 as part of a sweeping financial reform law, it required a study of arbitration clauses and provided the authority to issue regulations.
Three years earlier, Congress passed legislation that prohibited arbitration clauses for certain types of loans made to members of the U.S. military.
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CFPB may let you sue your bank instead of going to arbitration
Oct 7, 2015 | USA Today
By Kevin McCoy
The Consumer Financial Protection Bureau is weighing potential rules that would ban financial firms from using arbitration clauses to block customers from pursuing group lawsuits to win relief in disputes.
Contracts for many financial products such as credit cards, bank accounts and student loans contain clauses that typically state either the company or the consumer can require disputes to be resolved by privately appointed arbitrators, rather than the court system.
The clauses typically also block consumers from pursuing group claims through the arbitration process.
Financial and business groups generally support arbitration as a more efficient and less expensive way of resolving disputes over their services. A 2013 U.S. Supreme Court ruling reinforced the right of companies to set their own rules for resolving disputes with customers, a decision that limits class-action lawsuits in such disagreements.
However, consumer organizations contend that forced arbitration improperly limits customers' options and potential recovery.
"Consumers should not be asked to sign away their legal rights when they open a bank account or credit card," CFPB Director Richard Cordray said. "Companies are using the arbitration clause as a free pass to sidestep the courts and avoid accountability for wrongdoing."
The 2010 Dodd–Frank Wall Street Reform and Consumer Protection Act directed the consumer agency to study the use of arbitration clauses in financial markets and gave the regulator power to issue protective regulations.
A CFPB report sent to Congress in March showed that more than 75% of consumers surveyed about credit cards didn't know whether their cards required arbitration to resolve disputes. Fewer than 7% of those covered by arbitration clauses realized the requirement restricted their ability to file lawsuits, the report found.
In a first step toward potential new rules, the CFPB is publishing an outline of proposals under consideration in preparation for forming a small business review panel to gather feedback from industry stakeholders. The regulator is scheduled to hold a Denver field hearing on the issue Wednesday.
The proposals wouldn't ban arbitration clauses entirely. Instead, they would require clauses to state they don't apply to cases filed as potential class-action lawsuits unless a judge denies class certification or a court dismisses the underlying claims.
Additionally, the proposals would require companies that use arbitration clauses to give the CFPB records showing the claims filed by consumers and the awards issued. The data, which might be posted for public review, would help ensure the arbitration process is fair for consumers, the CFPB said.
If enacted, new rules would apply financial products overseen by the CFPB, including credit cards, checking and deposit accounts, prepaid cards, money transfer services and several types of loans.
The prospect of limiting arbitrations was hailed by several consumer groups. However, Lisa Gilbert, director of Public Citizen's Congress Watch Division, said the CFPB proposals didn't go far enough because they wouldn't eliminate "pernicious" forced arbitration clauses outright.
In July, the American Bankers Association, the Financial Services Roundtable and the Consumer Bankers Association sent Cordray a joint letter warning that eliminating arbitrations could "result in increased costs to consumers for financial products and services." Instead, the CFPB should focus on educating consumers about arbitration, the groups wrote.
"Arbitration has provided consumers the benefits of quick and easy access to an affordable dispute resolution option for nearly 90 years," Richard Hunt, President and CEO of the Consumer Bankers Association, said in a statement issued Wednesday. "As a last resort, if legal recourse is necessary, arbitration has proven to be the best path forward because it is mutually beneficial to all parties — consumers and lenders."
The arbitration proposals could also intensify contentions by business groups and some members of Congress that the regulator lacks oversight and improperly wields virtually unchecked authority.
"The CFPB undoubtedly remains the single most powerful and least accountable federal agency in all of Washington," Rep. Jeb Hensarling, R.-Texas, chairman of the House Financial Services Committee, said at the opening of a March hearing.
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Feds May Order Financial Firms To Allow Class Action Lawsuits
Oct 7, 2015 | NPR
By Chris Arnold
New federal rules could be in the works to make it easier once again for Americans to seek relief through class action lawsuits. That's the latest word out just this morning from the Consumer Financial Protection Bureau.
The CFPB is considering a ban on so-called forced arbitration clauses, which require customers to submit their claims to arbitration and stay out of court. Consumer rights attorneys complain that they see many people harmed by banks or other financial firms. But those customers, often unknowingly, have signed, for example, a credit card agreement that included a clause that blocks them from joining a class action suit.
CFPB Director Richard Cordray spoke to NPR last night:
"Under this proposed approach, consumers would again get their day in court to hold companies accountable for potential wrongdoing," Cordary said. "We think that's quite important."
Financial industry trade groups are lobbying against such a move by the CFPB. They say the rule would hurt financial firms and wouldn't help consumers.
But under the Dodd-Frank Wall Street Reform Act, Congress required the CFPB tostudy this issue. And it gave the bureau the power to craft new regulations to protect consumers, if it sees a need. The CFPB is now moving in that direction.
"Consumers should not be asked to sign away their legal rights when they open a bank account or credit card," said Cordray.
All this might create some political fireworks in the near future. Just a few months ago, a group of more than 80 House Republicans sent a letter to Cordray asking the CFPB to re-open the study it did which concluded that consumers were being harmed by arbitration clauses. The letter said the study was "fatally flawed."
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Most Arbitration Clauses Could Be Banned from Bank Contracts
Oct 7, 2015 | Reuters
Banks and credit card companies may not force customers to sign away their legal rights to take part in class-action lawsuits, under an early-stage U.S. government proposal that is likely to draw ire from Wall Street.
The Consumer Financial Protection Bureau said on Wednesday the proposal marked the first step in the process of potentially drafting regulations to ban certain "free pass" arbitration clauses, often buried in fine print, that consumers must sign off on when opening financial accounts.
Banks, credit card companies, lenders and broker dealers typically use such clauses as a way to shield themselves from lawsuits and lower their legal costs. Signers cannot file claims in federal courts, and have to resolve disputes individually through privately appointed arbitrators.
"The essence of the proposals we have under consideration is that they would get rid of this free pass that prevents consumers from holding their financial providers directly accountable for the harm they cause when they violate the law," CFPB Director Richard Cordray said in prepared remarks he plans to deliver at a hearing on the topic in Denver, Colorado.
"Companies should not be able to place themselves above the law and evade public accountability by inserting the magic word 'arbitration' in a document and dictating the favorable consequences," he said.
Arbitration clauses have long been a target of consumer advocacy groups which say they curb legal rights. But Wall Street banks have historically opposed any efforts to chip away at arbitration clauses.
The 2010 Dodd-Frank Wall Street reform law gave both the CFPB and the Securities and Exchange Commission the power to restrict or ban arbitration clauses, and it also required the CFPB to study pre-dispute arbitration clauses.
Some Democrats in Congress have urged the SEC to write a rule, but the agency has not taken up the issue so far.
The CFPB, by contrast, is inching toward action.
In March, the CFPB released its arbitration clause study which found that few consumers actually seek individual relief through arbitrations even though millions are eligible for group settlements. The vast majority of consumers do not even know if they are subject to an arbitration clause, the study showed.
The CFPB on Wednesday published an outline of proposals it will consider.
Not all arbitration clauses would be banned. Individual disputes, for instance, could still be resolved through arbitration.
But it would prohibit companies from including clauses that block class-action lawsuits. Companies that choose to use arbitration clauses for individual cases would have to submit information to the CFPB concerning any claims filed and awards issued.
The plan would apply to credit cards, checking and deposit accounts, prepaid cards, money transfer services, certain auto loans, auto title loans, payday loans, private student loans and installment loans.
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Financial regulators move to restrict forced arbitration
| Associated Press
By Ken Sweet
Suing your bank or debt collector might be getting a whole lot easier.
The Consumer Financial Protection Bureau is considering new regulations that would severely curtail a contentious practice called mandatory arbitration, which is when consumers are forced to take their disputes to a third-party mediator instead of a court of law. It is something consumer advocates have long argued does a disservice to people who have disputes with banks, credit card issuers and other financial service providers.
Many Americans don’t know that, buried in the fine print, they’ve agreed not to bring lawsuits against banks or other financial institutions if they have complaints over issues such as disputed charges on their checking accounts or credit card bills.
Instead, 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 goal of forcing disputes to be arbitrated instead of litigated was to streamline and lower the cost of resolving disputes that customers had with financial service providers.
But what started off as a good idea became corrupted over time, critics say. Companies who did not like how an arbitration firm would rule could shop around, giving arbitration companies a reason to rule in favor of the companies who hired them. Arbitration rulings were also not transparent.
The proposal, which the agency announced Wednesday, follows years of scrutiny by financial regulators, state attorneys general and consumer financial advocates.
“Companies can sidestep the legal system, avoid big refunds, and continue to pursue profitable practices that may violate the law and harm countless consumers,” said Richard Cordray, director of the CFPB, in a statement.
The proposal is the first step toward restricting the practice. The regulator is likely to face stiff resistance from the financial industry and the CFPB’s critics in Washington.
“Forcing consumers to hire expensive lawyers and go to trial rather than use a low-cost dispute resolution system harms the very low and middle income consumers the CFPB should be helping,” said Rep. Jeb Hensarling, R-Texas, who is chairman of the House Financial Services Committee.
The CFPB’s proposal does not create a blanket ban on arbitration, which is legal in the U.S. under the Federal Arbitration Act of 1925. Instead, the CFPB’s new rules would allow disgruntled customers to sue banks or other financial companies as a group through a class-action lawsuit, should they choose to, even if they’re subject to arbitration agreements. Financial companies will still be able to force individuals to settle disputes through arbitration, however those cases are less common. Many disputes are also resolved outside of the formal arbitration process.
Another proposal would force companies that continue to use arbitration to submit those claims to the CFPB, so the agency can monitor the process and make sure it’s fair to customers.
Roughly 20 years ago, arbitration began to become a common way for financial companies to resolve disputes with customers without having to go to trial. Over the years, the practice ballooned to the point that many financial services, ranging from checking accounts to private student loans have incorporated arbitration clauses in the fine print of their customer agreements.
In one notorious case in 2009, Minnesota Attorney General Lori Swanson found out that a debt collection company and the National Arbitration Forum, at the time one of the largest arbitration companies, were owned by the same investors. National Arbitration Forum was also involved in helping writing arbitration clauses into contracts.
“The Forum presented itself as this neutral party like our court system, but consumers didn’t know they were affiliated with same companies bringing the claims against them,” Swanson said in an interview.
Shortly after Swanson’s lawsuit was filed, National Arbitration Forum agreed to get out of the business of arbitrating consumer financial disputes.
If a group of bank customers found they were victims of unfair practices at their bank, under the new rules they would be able to pursue a class-action lawsuit against the bank.
Under current rules, customers can be bound to use individual arbitration to resolve disputes, even in cases where many individuals were victims of the same practice. For consumers, pursuing individual lawsuits is typically a drawn-out and expensive process.
“It is simply impossible to have an effective group claim where the vast majority of consumers have all lost their right to have their day in court,” Cordray said.
While it is only a partial ban in writing, arbitration experts say that by allowing class action lawsuits to go forward, the CFPB’s proposal is in essence a de-facto ban on arbitration because the service, which is typically paid for by the bank, becomes less cost-effective.
“If I was a consumer advocate against arbitration, and I was looking at what the CFPB proposed, I would be popping those champagne corks right about now,” said Alan Kaplinsky, a consumer financial services lawyer with Ballard Spahr LLP.
The Dodd-Frank Act required the CFPB to study forced arbitration and submit a report to Congress. In its final report, released in March, the CFPB found companies widely used arbitration clauses to dismiss class action lawsuits and, despite being on the majority of financial products, three out of four Americans did not know they were subject to arbitration.
The CFPB is holding a hearing on arbitration in Denver on Wednesday, where it will hear from consumers, advocates and industry officials about its proposal.
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CFPB Weighs Axing Class Action Bans In Arbitration Clauses
| Law360
By Evan Weinberger
The Consumer Financial Protection Bureau on Wednesday said it is working on a proposal that would stop companies from including clauses that block consumers from filing class action lawsuits in their arbitration clauses.
The plan being considered would stop short of an outright ban on mandatory arbitration clauses in credit card and other consumer financial contracts, something that had beenpushed by consumer advocates, but it would allow consumers to band together to get relief when problems arise.
By eliminating that condition of mandatory arbitration clauses, the CFPB said it would end what it calls the “free pass” that companies get by shielding themselves from potential class actions.
“Many violations of consumer financial law involve relatively small amounts of money for the individual victim. Group claims often are the only effective way consumers can pursue meaningful relief for harms that can add up to large amounts of money for financial providers,” CFPB Director Richard Cordray is expected to say at a field hearing Wednesday in Denver, according to prepared remarks.
The inclusion of mandatory arbitration clauses in credit card, bank account, payday loan and other contracts has become a consistent industry practices in recent years. The companies argue that mandatory arbitration provides a clean, efficient way for consumers to bring a grievance and get compensation if it is warranted.
But consumer advocates and Democrats in Congress have argued that the clauses are in reality a way for companies to evade consumer complaints because many do not pursue small claims through the arbitration process. Instead, the activists say that only a class action or some other group litigation strategy can successfully compensate wronged consumers.
The Dodd-Frank Act charged the CFPB with studying the effects of mandatory arbitration clauses and crafting rules to restrict them if the clauses were found to harm consumers.
A March report from the CFPB found what it determined to be significant harm that predispute arbitration agreements has caused to consumers — largely because of the fact that they choose to not go forward with arbitration cases — and it brought into question the companies’ argument that the decreased litigation risks lower costs for consumers.
The 700-page report, the second the CFPB conducted on mandatory arbitration clauses, analyzed nearly 850 consumer finance agreements and more than 1,800 consumer arbitration disputes filed between 2010 and 2012.
The report found that consumers acting on their own either through arbitration or individual litigation did not fare as well as class action plaintiffs.
Arbitrators awarded a combined total of under $175,000 in damages and less $190,000 in debt forbearance in 1,060 cases filed in 2010 and 2011, the report found.
Arbitrators also ordered consumers to pay a total of $2.8 million in that period, largely over disputed debts. Companies can also take consumers to arbitration.
Litigation filed by individuals saw similar meager recoveries, the CFPB said.
In contrast, around 32 million consumers were able to recover approximately $2.7 billion in class action settlements over a five-year period, the CFPB said.
Approximately 75 consumers surveyed by the CFPB are unaware that they are subject to binding arbitration on credit card and other consumer financial products, the report found.
For that reason, consumer advocates had been pushing the CFPB to ban mandatory arbitration outright, instead making it something a consumer could choose.
Instead, the CFPB has opted to move forward with a proposal that would bar companies from taking consumers to arbitration in cases that are filed as class actions until class certification is denied or the case is dismissed. Cases taken to arbitration and their results would also have to be reported to the CFPB.
The approach is modeled on the one the Financial Industry Regulatory Authority has in place for broker-dealer disputes, with the approval of the U.S. Securities and Exchange Commission, the CFPB said.
However, the bureau is not ruling out further action on the clauses.
“Although we are not proposing to prohibit the use of predispute arbitration clauses, we will continue to monitor the effects of such clauses on the resolution of individual disputes,” Cordray is expected to say Wednesday.
The proposal put forward Wednesday is in its early stages. The CFPB said it would submit it to a small-business review panel to get input from such businesses.
From there, the CFPB would move on to issuing a notice of proposed rule-making and then a final rule after receiving and considering comments. That means that any final action on mandatory arbitration will not come for some time.
Bank industry groups said that they hope the CFPB reconsiders its plan.
"We are disappointed the bureau, despite numerous studies and the CFPB’s own report, is choosing to side with trial attorneys over the interests of consumers. Given today’s announcement is not final, we hope the CFPB will reconsider its decision,” said Richard Hunt, the president and CEO of the Consumer Bankers Association. -
CFPB may ban arbitration clauses in financial service contracts
Oct 7, 2015 | Consumer Affairs
By Truman Lewis
Arbitration clauses are often presented as protecting consumers from the necessity of going to court to settle disputes. But in reality, forced arbitration strips consumers of the right to sue individually and as part of a class action.
The Consumer Financial Protection Bureau (CFPB) is not happy about this and is considering proposing rules that would ban consumer financial companies from using “free pass” arbitration clauses.
Buried in many contracts for consumer financial products like credit cards and bank accounts, most arbitration clauses deny consumers the right to participate in group lawsuits against companies. With this free pass, companies can sidestep the legal system, avoid big refunds, and continue to pursue profitable practices that may violate the law and harm countless consumers.
“Consumers should not be asked to sign away their legal rights when they open a bank account or credit card,” said CFPB Director Richard Cordray. “Companies are using the arbitration clause as a free pass to sidestep the courts and avoid accountability for wrongdoing. The proposals under consideration would ban arbitration clauses that block group lawsuits so that consumers can take companies to court to seek the relief they deserve.”
Not everyone thinks the CFPB is on the right track.
Matt Adler, partner and chair of the International and Domestic Arbitration Practice Group at Pepper Hamilton LLP says there are substantial Constitutional hurdles for the CFPB. He noted that Justice Scalia held for the majority of the American Express vs. Italian Colors case, writing: "No contrary Congressional command requires us to reject the waiver of class arbitration here."
Thus, said Adler, "Unless there is an amendment to the Federal Arbitration Act, the agency rule should not survive the recent wave of Supreme Court decisions upholding these waivers."
Sen. Richard Blumenthal (D-Conn.), on the other hand, praised the Bureau's action, calling it a "crucial step towards ending the use and abuse of forced arbitration clauses that deny millions of Americans the chance to seek justice."
"[T]these clauses have one purpose and one purpose only: to stop large financial institutions that abuse their customers from being held accountable," Blumenthal said in an email. "I look forward to supporting the CFPB’s efforts to ban forced arbitration in financial contracts, and I will continue fighting to end the use of this practice in every sector of the economy.”
In May, Blumenthal led a letter with Senator Al Franken (D-Minn.) urging the CFPB to undertake rulemaking to eliminate use of forced arbitration clauses and is an original co-sponsor of the Arbitration Fairness Act of 2015 (S.1133), which would ban all forced arbitration agreements so far as they impact employment, consumer, antitrust, or civil rights dispute.
Restricts consumers' relief
A CFPB study – released in March of this year – showed that arbitration clauses restrict consumers’ relief for disputes with financial service providers by allowing companies to block group lawsuits.
The study also found that, in the consumer finance markets studied, very few consumers individually seek relief through arbitration or the federal courts, while millions of consumers are eligible for relief each year through group settlements. According to the study, more than 75 percent of consumers surveyed in the credit card market did not know whether they were subject to an arbitration clause in their contract. Fewer than 7 percent of those consumers covered by arbitration clauses realized that the clauses restricted their ability to sue in court.
Today, the Bureau is publishing an outline of the proposals under consideration in preparation for convening a Small Business Review Panel to gather feedback from small industry stakeholders. This is the first step in the process of a potential rulemaking on this issue.
The proposals being considered would ban companies from including arbitration clauses that block class action lawsuits in their consumer contracts. This would apply to most consumer financial products and services that the CFPB oversees, including credit cards, checking and deposit accounts, prepaid cards, money transfer services, certain auto loans, auto title loans, small dollar or payday loans, private student loans, and installment loans.
An outline of the proposals under consideration is available here.
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Consumer bureau: No language blocking class-action suits
| The Hill
By Peter Schroeder
A top financial regulator announced Wednesday it was considering barring a common move by financial companies to limit customers’ legal options.
The Consumer Financial Protection Bureau is moving forward with a plan to propose rules that would bar so-called “forced arbitration” clauses common in many financial product contracts. The watchdog argued that the language amounted to a “free pass” for companies, since they can prevent customers from taking them to court for wrongdoing.
“Consumers should not be asked to sign away their legal rights when they open a bank account or credit card,” said CFPB Director Richard Cordray. “Companies are using the arbitration clause as a free pass to sidestep the courts and avoid accountability for wrongdoing. The proposals under consideration would ban arbitration clauses that block group lawsuits so that consumers can take companies to court to seek the relief they deserve.”
If the CFPB goes ahead with its rules, it would not ban arbitration clauses outright. Rather, the regulator would require the clauses to first allow consumers the opportunity to go to court before going to arbitration, and also require companies to report the outcomes to the CFPB for monitoring. The CFPB also said it was considering making claims and awards public for all to see.
The rules are likely to face a significant challenge from the business sector, which was dismissive of a March report the regulator put out criticizing the practice. Arbitration clauses found in contracts for products like credit cards or bank accounts typically bar customers from pursuing class-action lawsuits, and instead require arbitration to settle grievances.
An earlier study by the CFPB on the practice found that consumers regularly received far less through arbitration than a court challenge. On average, arbitration settlements yielded $175,000 for consumers, compared to nearly $1 million in court cases.
The study, mandated by the Dodd-Frank financial reform law, also found that most Americans did not even realize they had signed on to binding arbitration language when they signed contracts for financial products.
But that study was quickly criticized by the business community, which argued the CFPB had produced a biased product. Business groups, like the U.S. Chamber of Commerce, argued that clauses requiring arbitration ensures an efficient and cost-effective way to settle disagreements without protracted and costly court fights.
The CFPB has not yet proposed the rules, but instead has put together an outline of what it is considering, which it will put forward to industry stakeholders on its Small Business Review Panel. But Wednesday’s announcement marks the CFPB’s first step in issuing formal rules barring the practice.
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CFPB To Consider Rules That Would Revoke Banks’ “License To Steal”
| Consumerist
By Chris Morran
The lengthy, often complicated terms of use for more than half of all credit cards — and nearly half of all federally insured bank deposits — include clauses that force customers into arbitration, taking away their right to sue these companies in a court of law and usually blocking them from joining together in a class action. Critics argue that these forced-arbitration clauses allow banks and other businesses to break the law with impunity. Heeding the call of lawmakers and consumer advocates, the federal Consumer Financial Protection Bureau has decided to consider rules that would ban this practice among financial institutions.
For those unfamiliar with arbitration clauses, here’s how it works: Somewhere in the contract or user agreement with a company (it’s not just banks; cable companies, telecom providers, tech manufacturers, and others are increasingly doing this), you might find a paragraph or two, usually under the heading of “dispute resolution.”
You can’t change these terms and rarely have the choice to opt out, meaning you have no choice but to accept the full contract or use another product.
But if you ever have a legal dispute with that company, you’ll find that these few sentences prevent you from going to court. Instead, you’re forced to enter into a process of mandatory binding arbitration that heavily favors the business. They understand the process, know the arbitrators (sometimes a little too well), and any damages that can be awarded are very limited so the customer is unlikely to find anyone willing to represent them in their case.
Additionally, many arbitration clauses explicitly bar customers from joining together as an affected class. Since many corporate legal disputes involve expensive experts and research, the award for an individual case (or even a few individual cases) is rarely enough to make it worthwhile for the customer or their attorney.
In 2011, the Supreme Court upheld the legality of these class-action bans in the case of AT&T Mobility v. Concepcion. Since then, the number of businesses using arbitration has increased.
Then in 2013, the nation’s highest court went even further in affirming the difficulty of challenging arbitration clauses. In the matter of American Express v. Italian Colors Restaurant, a group of AmEx-accepting merchants claimed that the only way they could afford to mount an antitrust lawsuit against the credit card giant was to pool their resources in a class action. On an individual basis, the costs would be too high and the rewards too little to justify the expense. But the SCOTUS majority held there was no “effective vindication” exemption to these arbitration agreements, even if they allowed companies to break the law.
The Dodd-Frank Wall Street Reform and Consumer Protection Act directed the CFPB to study arbitration, and earlier this year, the Bureau released its first report on arbitration in the financial products sector.
It found that while the clauses are incredibly prevalent — 92% of prepaid debit cards and 88% of cellphone contracts use them — most consumers are completely unaware if they are affected. According to the CFPB, of those Americans constrained by arbitration agreements, fewer than 7% understood that this meant they had given up their right to file a lawsuit.
“Consumers should not be asked to sign away their legal rights when they open a bank account or credit card,” said CFPB Director Richard Cordray in statement. “Companies are using the arbitration clause as a free pass to sidestep the courts and avoid accountability for wrongdoing. The proposals under consideration would ban arbitration clauses that block group lawsuits so that consumers can take companies to court to seek the relief they deserve.”
Congress also gave the CFPB the authority to issue regulations in the public interest. But the rulemaking process is not an expedient one. So the first step is today’s release of an outline of the proposals under consideration. This is being done in advance of convening a Small Business Review Panel to gather feedback from industry stakeholders.
The proposals being considered would ban companies from including arbitration clauses that block class action lawsuits in their consumer contracts. While the CFPB can’t issue an outright ban on all arbitration clauses, the Bureau believes it has the authority to regulate these clauses on a variety of products, including: credit cards, checking accounts, prepaid cards, money transfer services, certain auto loans, auto title loans, small dollar or payday loans, private student loans, and installment loans.
And the proposed ban would not be an outright prohibition on arbitration clauses. Instead, it would require these terms to explicitly state that forced arbitration does not apply to class actions.
This is particularly important because many consumers don’t know when a company they do business with has broken the law. And even those who are aware may not have the time or inclination to pursue an individual claim, especially if the rewards are limited.
CFPB research found that only around 2% of U.S. consumers would consult an attorney to pursue an individual lawsuit as a means of resolving a small-dollar dispute. But if they are part of a class action, these consumers don’t need to pursue that individual claim.
“Group lawsuits depend on a group,” explains CFPB Director Cordray in his prepared remarks for today’s announcement in Colorado.
Even in cases where companies allow users to opt out — thus retaining their right to file lawsuits, Cordray says “The few consumers who opt out of arbitration find that very few others are still available to join their lawsuits. It is simply impossible to have an effective group claim where the vast majority of consumers have all lost their right to have their day in court.”
It’s also hoped that by taking away arbitration as a way to avoid class actions, companies will be more concerned about complying with the law.
Companies, most notoriously AT&T, have argued that mandatory binding arbitration is a pro-consumer practice that helps expedite disputes, and that the lower costs of arbitrating disputes is passed on to customers. Cordray says this doesn’t jive with the data.
“Our study was able to examine this claim closely by comparing large credit card companies that did and did not have arbitration clauses in their contracts, including some companies that previously had such clauses but had stopped using them in the wake of adverse litigation,” he explains. “Our analysis did not find evidence that credit card companies either increased prices or reduced access to credit when they eliminated their arbitration clauses.”
The CFPB proposals are being applauded by consumer advocates who have long called for an end to forced arbitration.
“The CFPB proposal would stop a company that has harmed millions of Americans from avoiding accountability for widespread wrongdoing,” says Lauren Saunders, associate director of the National Consumer Law Center. “If a company violates the law, a judge should be able to order the company to repay all of its victims and not force each person to hire their own attorney. Class action bans are a corporate get-out-of-jail-free card.”
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