Proposal Seeks Ban of Forced Arbitration Preventing Class Action Lawsuits Against Financial Companies

If a new proposal put forward by federal regulators is adopted, financial companies will no longer be able to use forced arbitration clauses to avoid class action lawsuits and put consumers in a position where they are unable to pursue grievances in the court system. 

Last week, the Consumer Financial Protection Bureau (CFPB) released new proposed rules (PDF) banning the use of mandatory forced arbitration clauses used by financial institutions to avoid class action lawsuits. The CFPB called the clauses “contract gotchas” that allow banks, credit card companies and other financial institutions to avoid accountability. Public comment on the proposed rules are being accepted for 90 days, before moving toward a final ruling.

“Signing up for a credit card or opening a bank account can often mean signing away your right to take the company to court if things go wrong,” CFPB Director Richard Cordray said in a press release. “Many banks and financial companies avoid accountability by putting arbitration clauses in their contracts that block groups of their customers from suing them. Our proposal seeks comment on whether to ban this contract gotcha that effectively denies groups of consumers the right to seek justice and relief for wrongdoing.”

Forced arbitration, also known as pre-dispute arbitration clauses, are commonly found in credit card agreements, loan paperwork, mobile wireless contracts, nursing home entrance agreements and other circumstances where consumers are placed in a position where they have no alternative but to waive their right to go to court in order to obtain services.

The result, critics say, is that individuals have to face powerful financial firms, and their considerable resources, on their own in arbitration that often appears to be skewed in favor of the financial industry, no matter how many clients claim to have been injured by the same problem or issue.

In a report released in March 2015, the CFPB found that tens of millions of Americans have entered into forced arbitration agreements, and most of them are not only unaware of how restrictive they are, but they are usually not even aware they have agreed to such a contract.

The report also found that most consumers who have signed arbitration clauses wrongly believe they can participate in class action lawsuits and are unaware of any opt-out opportunities.

“Over the past decade, large corporations have converted the fine print in standard form and consumer contracts into a way to escape liability for wrongdoing,” said Robert Weissman, president of Public Citizen, in a press release supporting the CFPB proposal. “Companies have discovered these rip-off clauses let them commit egregious wrongs and escape any accountability. The CFPB’s proposed rule will end the worst elements of forced arbitration by restoring consumers’ right to once again band together over shared wrongs.”

The practice has been under attack on several fronts. In February, a group of U.S. Senators proposed legislation called the Restoring Statutory Rights Act (PDF), which would allow federal or state courts to revoke any arbitration agreement found to be “unconscionable, invalid because there was no meeting of the minds, or otherwise unenforceable as a matter of contract law or public policy.” It would also protect states from interference by federal laws when they choose to crack down and restrict forced arbitration clauses.