Regulatory Agency Removes Roadblocks to Consumer Lawsuits Against Financial Institutions

The Consumer Financial Protection Bureau (“CFPB”) has recently banned most types of mandatory arbitration clauses that require credit card and bank customers to use an arbitrator when they have a dispute with a financial institution. The new rule is intended, in part, to deter wrongdoing by financial institutions by allowing customers to file class action lawsuits against them.

Mandatory arbitration clauses are found in the fine print of agreements related to an enormous number of financial products, including credit cards and checking accounts. Opponents of such clauses argue that they are a way for companies to avoid the court system. This is because, for example, a consumer who wishes to dispute a relatively small overdraft charge is not likely to hire a lawyer to sue its bank. However, a group of consumers who were all individually impacted by the same charge are more likely to dispute it collectively in the form of a class action lawsuit.

The CFPB’s new rules are not, however, a total ban on arbitration clauses and will not apply retroactively to existing contracts. Financial companies will still be able to force individuals to address some disputes through arbitration. Financial institutions have opposed banning arbitration clauses, arguing that arbitration is a more efficient way of handling small disputes. Certainly, these companies are also concerned about exposure to large lawsuits.

The CFPB is an independent agency which was created under the Obama Administration. Opponents of the agency view the CFPB as having too much power and too little oversight. Its new rules are likely to face opposition from not only the banking industry, but also Republicans in the House and Senate, and the White House. However, the new rules have the potential to be popular with consumers. Moreover, Congress has previously passed laws that ban arbitration clauses in other contracts for financial products – notably, mortgages. If you would like more information on this topic, contact PLDO’s business law team at . We welcome your comments, questions and suggestions.