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You May Soon Be Able to Take Your Credit Card Company to Court

May 05, 2016

Millions of consumers may soon have new legal recourse to fight wrongdoing by lenders and credit card companies. The Consumer Financial Protection Bureau proposed a new rule Thursday that would allow more people to take their credit card and loan complaints to court, rather than being forced to individually argue their case in front of closed arbitration panels.

The CFPB estimates that as many as half of all consumer credit card debt and checking account deposits fall under "gotcha" mandatory agreements that force consumers into using alternative dispute resolution forums to settle issues, according to a study by the agency released last March.

“Many banks and financial companies avoid accountability by putting arbitration clauses in their contracts that block groups of their customers from suing them,” CFPB Director Richard Cordray said in a statement Thursday. “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.”

Thursday’s proposed rule would prohibit banks and credit card companies from putting these mandatory arbitration clauses in new contracts that prevent consumers from banning together to bring class action lawsuits.

Many times, consumers are reluctant to challenge credit card or loan companies in court, even if they aren’t bound by arbitration agreements. Only about 2% of consumers with credit cards surveyed by the CFPB would consult an attorney or take legal action when it comes to disputes over small amounts. But the CFPB found that roughly 32 million consumers could be eligible for a part of class action settlements -- which can mitigate the personal costs and hurdles associated with challenging these companies -- each year.

Three out of four consumers surveyed by the CFPB did not even know whether they had signed away their right to bring a lawsuit against these financial companies.

The CFPB also claimed the new rule would enhance transparency by requiring companies that utilize arbitration clauses to report the cases and awards to the CFPB.

The agency is asking for public comments over the next 90 days, after which the CFPB will review the submissions and take the next steps toward putting out a final rule. Like other financial regulators, CFPB does not need congressional approval in order to pursue rulemaking.

It's too soon to tell whether the bureau's anti-arbitration proposal will become law. The American Banker Association has already criticized the move, saying consumers would have to pay higher legal fees if arbitration was dropped in favor of expensive legal suits.

“When needed, arbitration is an efficient, fair and low-cost method of resolving disputes in a fraction of the time — and at a fraction of the cost — of expensive litigation,” the group said in a statement, adding the current system helps keep costs down for all consumers.

The CFPB’s study found no evidence that arbitration clauses lead to lower prices for consumers.

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