In the face of political opposition, the federal Consumer Financial Protection Bureau announced a new rule protecting consumers’ right to join class action lawsuits. The rule would keep banks and credit card companies from using arbitration clauses to keep small claims out of court.
Why Do Arbitration Clauses Matter?
Almost every cell phone, credit card, or bank account agreement has a mandatory arbitration clause buried in the fine print. This language requires parties to have disputes heard before a private decisionmaker (an arbitrator), hired by the parties, rather than a judge. Since the early 2000s, large companies have been using these arbitration clauses against their consumers to avoid paying for violations of federal law.
These violations often don’t result in large damage awards to any one consumer. For example, if a bank improperly assessed late penalties to customers, each customer may only be entitled to a refund of that fee (plus attorney fees and costs). As one federal judge has said “only a lunatic or a fanatic sues for $30.” But when a bank issues that same $30 fee to its thousands of customers, the value adds up quickly.
The traditional legal solution is a class-action lawsuit: one legal case where a handful of representative plaintiffs sue a company for the damages caused to all consumers in the same situation. When a verdict or settlement is reached, the plaintiffs’ attorneys send out checks to everyone in the class.
But arbitration clauses require each person to resolve his or her dispute with the company individually in private. This makes class action lawsuits impossible and recovery for these small individual damages unreasonable. U.S. Supreme Court cases in 2012 and 2013 upheld this use of arbitration clauses, making it financially prohibitive for consumers to protect themselves against these small-value violations.
CFPB Rule Saves Class Action Lawsuits
On July 10, 2017, the Consumers Financial Protection Bureau (CFPB) announced a final version of a rule to restore consumers’ right to file class action lawsuits. The rule would prevent financial institutions and lenders (including credit card companies) from using pre-dispute arbitration clauses to block class action litigation. Future arbitration clauses by these companies will have to state consumers’ right to file class action lawsuits.
The rule is the result of Obama-era policies and research, and that means it could face opposition from Congress. The CFPB is already under threat from the CHOICE Act, which would reduce its authority and funding. Supporters of the bill may use the Congressional Review Act to overturn the rule and allow big businesses to continue to dodge consumer protection class action lawsuits. If they do, it could leave thousands of consumers without a financially practical way to protect themselves against the banks.