Companies can’t block consumers from joining together to bring lawsuits when things go wrong

A new rule bans companies from using mandatory arbitration clauses to deny groups of people their day in court.

Many financial products such as credit cards and bank accounts have arbitration clauses in their contracts that prevent consumers from joining together to sue their bank or financial company for wrongdoing. By forcing consumers to give up or go it alone – usually over small amounts – companies can sidestep the court system, avoid big refunds, and continue harmful practices, according to the Consumer Financial Protection Bureau.

The bureau’s new rule will deter wrongdoing by restoring consumers’ right to join together to pursue justice and relief through group lawsuits, said Richard Cordray, director of the bureau.

"Arbitration clauses in contracts for products like bank accounts and credit cards make it nearly impossible for people to take companies to court when things go wrong," said Cordray. "Our new rule will stop companies from sidestepping the courts and ensure that people who are harmed together can take action together." 

Arbitration clauses usually say that either the company or the consumer can require that disputes between them be resolved by arbitrators, except for individual cases brought in small claims court. While these clauses can block any lawsuit, companies almost always use them to block group lawsuits, known as “class action” lawsuits. With group lawsuits, a few consumers can pursue relief on behalf of everyone who has been harmed by a company’s practices. Almost all mandatory arbitration clauses force each harmed consumer to pursue individual claims against the company, no matter how many consumers are injured by the same conduct. However, consumers almost never spend the time or money to pursue formal claims when the amounts at stake are small.

A study by the bureau showed that credit card issuers representing more than half of all credit card debt and banks representing 44 percent of insured deposits used mandatory arbitration clauses. However, three out of four consumers the bureau surveyed for the study didn’t know whether their credit card agreement had an arbitration clause. These clauses are common and unknown, and they’re bad for consumers, Cordray said.

Ed Mierzwinski, consumer program director for U.S. PIRG, said the rule will have positive benefits for consumers.

“This rule will prevent Wells Fargo and other wrongdoers from blocking groups of consumers from taking them to court,” Mierzwinski said. “Incredibly, Wells Fargo has argued that mandatory arbitration clauses on its actual accounts prevent its customers from bringing class actions against its millions of fake accounts.”

He said Congress gave the bureau the authority to develop this rule and, in 2007, Congress banned arbitration in some loans to servicemembers and veterans. In addition, in 2010, Congress banned arbitration in most mortgages.

Copyright 2017, Rita R. Robison, Consumer Specialist