Why don't consumers more regularly bring suit against their "bad" bank or debt collector? Standard arbitration clauses buried in consumer contracts often prohibit such suits. Basically consumer financial companies use a "free pass" arbitration agreement clause to prevent consumers from suing in groups ("class action") to obtain relief. According to the CFPB Director Richard Cordray "Companies are using the arbitration clause as a free pass to sidestep the courts and avoid accountability for wrongdoing". Since the financial collapse in 2008, laws and regulations have been put in place to protect consumers but this proposal takes it one step further by giving consumers the ability and the right to fight back. Currently, the free pass provisions bind customers to the use of individual arbitration to resolve disputes, which can be drawn out and expensive for the consumer.
It may now become much easier for consumer actions to proceed if the Consumer Financial Bureau Protection (CFPB) approves new rules on consumer arbitration agreements. This proposal was initiated by the Dodd Frank Wall Street Reform and Consumer Protection Act where Congress directed the CFPB to issue regulation geared towards the public interest and for the protection of consumers, including a look at these arbitration practices. The new rule could allow consumers to pursue a class-action lawsuit. George Slover with Consumer Union weighed in via USNEWS stating, "This proposal is a tremendous step toward cleaning up a system that has heavily favored companies over consumers who were wronged". While financial services companies will oppose the move, Even with heavy push back from the Financial companies, it seems CFPB will enforce this proposal as a new regulation. The Supreme Court decision in DirecTV v. Imburgia, will potentially set up a challenge to new rulemaking by the CFPB in this area. (see, Troutman Sanders). DirecTV, a 6-3 decision written by Justice Breyer, held that the Federal Arbitration Act preempted a California law that invalidated arbitration clauses if they contained a prohibition on class-wide arbitration.
The benefits of the CFPB proposal could have long lasting positive effects for consumers by opening up a class action avenue in court and make arbitration more transparent when used against financial institutions and services that use arbitration to shield bad practices that individual consumers cannot fight because the arbitration is prohibitively expensive.. Of course, arbitration proponents also correctly assert that the free pass provisions keep away spurious class actions. Where the CFPB ultimately lands on this dicey issue is yet to be seen, but expect a big fight on this one with good arguments for and against the free pass.
- L. Regis/JSM
