Banks Cannot ‘Sidestep the Courts’ by Banning Class Actions

Today the Consumer Financial Protection Bureau (“CFPB”) laid out draft terms of its long-awaited ruling on forced arbitration. Director Richard Cordray said, “Consumers should not be asked to sign away their legal rights when they open a bank account or credit card.” He explained, “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.” The proposed new rule would prohibit banks and other financial institutions from banning class actions by way of arbitration clauses. Such clauses are commonly hidden deep in the small print of form contracts where consumers will not see them and where they appear in confusing legal language no consumer would understand.

Consumer advocates have long fought against mandatory arbitration provisions, which basically lock ordinary people out of court. Without access to the courts, borrowers have no realistic means to challenge deceptive lending practices, abusive foreclosure measures, or even outright fraud. Statistics have shown private arbitration is unfair and one-sided against consumers.

Individual forced arbitration is bad enough, but lenders – emboldened by courts that upheld preprinted arbitration clauses – began to insert class action waiver language inside the arbitration clauses. This meant that consumers were not only barred from the courthouse, but limited to bringing cases one at a time in the private forum. Since many illegal banking practices are simply unknown to borrowers, and involve relatively small amount of theft on the part of the banks, class actions are the only way to enforce consumer protection laws. Without consumer class actions, banks can get away with cheating and fraud just because people do not know their rights or cannot challenge such practices on a one-to-one basis.

That may be about to change.

Today at a hearing in Denver, Colorado, the CFPB unveiled a draft of its proposed new rule. This rule is the agency’s response to a study of arbitration which came out last March. Among other problems with mandatory arbitration, that study showed that arbitration clauses restrict consumers’ relief for disputes with financial service providers by allowing companies to block group lawsuits. You can read the full report here.

The current proposal would not ban arbitration of individual cases, but would ban class action waivers, thereby allowing consumer borrowers to seek collective redress of lending abuses. CFPB Director Richard Cordray said, “Companies are using the arbitration clause as a free pass to sidestep the courts and avoid accountability for wrongdoing.” That is certainly true. While consumer advocates are disappointed that the CFPB is not prepared to ban forced arbitration completely, they applaud the important step of restoring the right to class actions.

Financial institutions have profited greatly by blocking judicial scrutiny of their practices. During the Bush administration, regulation was lax. Without a public justice system to enforce consumer protection laws, banks can – and did – act with impunity in breaking the law. If being a banker was considered an honorable profession before the 2008 bailout, many people felt that myth was debunked by events of the recent recession. The CFPB was enacted as part of the Dodd-Frank Act in the aftermath of that financial crisis and one of its original mandates was to address the issue of forced arbitration in consumer finance. The banking industry has had more than 100 lobbyists attacking the CFPB since its inception and that lobby is bound to go into overdrive to attack this proposed ruling.

Meanwhile, Paul Band, Executive Director of the consumer advocacy group Public Justice, and a longtime critic of forced arbitration, called the proposed rule “an enormous step toward protecting consumers.” Consumer borrowers throughout the country can only hope the CFPB will keep up its stride.