The Consumer Financial Protection Bureau (CFPB) banned most types of arbitration clauses on Monday, ending the requirement imposed by credit companies and banks that customer disputes must be mediated outside of court.
Arbitration clauses, often found in the fine print agreements for financial products, including credit cards and checking accounts, mean there is no right to sue for resolution. The CFPB found most customers do not carefully read the agreements and are thus unaware they have waived their right to sue and are subject to arbitration.
The clauses are used extensively by banks and can limit customer ability to sue for restitution. For example, in 2016, Wells Fargo & Company denied customers affected by its questionable sales practices from filing class-action lawsuits. Pressure from politicians and advocacy groups resulted in the bank waiving its right to invoke the arbitration clauses.
Banks opposed the ban on the clauses stating that arbitration was more efficient to resolve small disputes and that class-action lawsuits mostly benefit the lawyers involved. However, CFPB Director, Richard Cordray, stated: “Our new rule will stop companies from sidestepping the courts and ensure that people who are harmed together can take action together.”
The Consumer Bankers Association and other lobbying groups characterize the new rules regarding arbitration as overreaching and have called on Congress to act.
The Dodd-Frank Act of 2010 created the CFPB and mandated that the agency review arbitration clauses and issue regulations to limit them if necessary. The new rules do not completely ban arbitration clauses. Companies can still force individuals to enter arbitration for disputes. The ban also only applies to new contracts and does not change existing contracts.
The banking industry is expected to lobby Congress on the new regulations. Republicans in Congress often describe the agency as having too much power and too little oversight and have used the Congressional Review Act to undo Obama-era regulations.
The act empowers Congress by simple majority to override agency rules that are finalized within 60 legislative days. Chairman of the House Financial Services Committee, Jeb Hensarling (R-Texas), has indicated his support for rejecting the rule.
Congress has already banned arbitration clauses in some financial products such as mortgages and loans to military personnel.
“I am, of course, aware of those parties who have indicated they will seek to have the Congress nullify this new rule,” Director Cordray said in a statment. “My obligation as the director of the Consumer Bureau is to act for the protection of consumers and in the public interest. In deciding to issue this rule, that is what I believe I have done.”
The Fair Isaac Corp., the creator of FICO scores that measure credit card worthiness, reported Monday that while the average American credit score has increased to its highest level since data began to be compiled in 2005, credit card balances and payment delinquencies have also increased.
The rules are expected to go into effect in eight months, or 241 days after publication.
[AP] [RT America]