CFPB Proposes Major Changes to Forced Arbitration Clauses

On May 5, the Consumer Financial Protection Bureau (CFPB) announced a proposal that will prohibit certain financial services providers from using forced arbitration clauses to deny consumers the right to file class action lawsuits. The CFPB, which is a governmental agency formed in 2008, announced that the proposal is an effort to protect the rights of consumers to pursue justice.

Why this is Needed

If you have recently opened a bank account or signed up for a credit card, you are subject to the limitations of forced arbitration – and you probably don’t even know it. Buried deep in the contract you signed is a clause that takes away your right to join others in a class action lawsuit. As a result, the provider of that service can pursue practices that could be in violation of the law.

Arbitration clauses are in hundreds of millions of consumer contracts. In most cases, they state that if you have any sort of issue with the service provider, you have to go through a privately appointed arbiter to settle that dispute.

In most cases, the harm inflicted on an individual consumer is too small for that person to go through arbitration. It just wouldn’t be practical. According to the CFPB, only about 2 percent of consumers with a credit card would pursue any sort of action in order to resolve a dispute involving a small amount of money.

Most arbitration clauses also deny you the right to join other consumers and act as a group to protect your rights. No matter how many people may have been harmed by the same action, each person has to settle his or her claim individually.

But the CFPB is seeking to put an end to that limitation. The agency is proposing that financial services providers can no longer try use arbitration clauses to prevent class actions. While providers will still be able to use arbitration clauses, new contracts will have to clearly state that they cannot be used in an effort to stop class actions.

Hopefully, the CFPB proposal will act as a deterrent to companies trying to skirt the law, and make them less likely to follow practices that bring harm to consumers.