The Consumer Financial Protection Bureau has proposed new rules that would limit the ability of large financial service companies like banks and credit card issuers to require consumers to give up their rights to sue.
Hidden in the fine print of basic contracts, many large financial service companies include mandatory arbitration clauses that prohibit class action lawsuits and force customers to settle disputes through private negotiation with an arbitrator paid by the company.
The CFPB announced Thursday that it would seek public comment on the proposed regulations, which would prohibit arbitration agreements that block consumer class action suits. The new rules would also require companies to submit data on the arbitration proceedings that do occur for review.
“Many banks and financial companies avoid accountability by putting arbitration clauses in their contracts that block groups of their customers from suing them,” CFPB Director Richard Cordray said in a statement.
Given the low dollar amounts typically involved, it’s often impractical for a single consumer to take action against a company, but class action suits might bring relief to large groups who have all experienced the same violation. However, the arbitration clauses make bringing such suits impossible.
In a report to Congress last year, the CFPB found that three in four consumers didn’t know whether their contracts with financial firms included mandatory arbitration clauses, although they occurred in 86 percent of private student loans contracts and 16 percent of credit card contracts.