On May 5th, 2016 it was announced that the new Federal Consumer Financial Protection Bureau intended to enact a rule that would allow consumers to participate in class-action lawsuits against banks and restrict the use of mandatory arbitration clauses in many financial contracts. There will be a public comment period.
To understand the significance of this proposed rule, it helps to understand the background.
For many years large consumer oriented businesses such as banks, student loan lenders, credit card companies, telecommunications companies, internet providers, power companies, and many, many others have been including in consumer/customer contracts a provision that says any dispute with them must be decided by mandatory arbitration rather than a lawsuit filed in a court of law. These mandatory arbitration clauses have become ubiquitous. They are even now commonly seen in nursing home contracts and some doctors are using them. Federal and state courts have almost uniformly upheld these mandatory arbitration provisions. These legal victories emboldened big businesses to add to the mandatory arbitration provision a clause which prohibited consumers from joining together in a class action case. Together, these contractual provisions have had the effect of virtually stripping consumers of any meaningful recourse against banks that commit wrongful acts. Here’s how it works in a hypothetical example.
Let’s assume you sign the typical contract with a bank or a credit card company. You are then charged fees that you don’t believe are proper. Your complaint is about a few hundred dollars or, for that matter, even a few thousand dollars. You make your complaint to the company and don’t get satisfaction. You then consult a lawyer. The lawyer points out there is a mandatory arbitration clause and the fact that the arbitration must take place in Dallas, Houston, New York City, or somewhere else you don’t want to go. Also, the rules of the arbitration, the law that will apply and the selection of the arbitrator will be controlled by the bank and you won’t be able to recover your attorney’s fees and costs even if you win. This is likely the first time you ever noticed the arbitration clause, but even if you had seen it, it would make no difference because all companies in the same business have a contract with the same provision. You had no real choice. Your decision is obvious. You won’t commit financial suicide by hiring a lawyer to make a claim in arbitration. You will just have to let it go. But, what if you and your lawyer learn that the company is committing this same wrong against customers all over the country? Can all of you can band together to make a claim that is large enough to justify pursuing the company in arbitration or in court? No, you can’t - there is also that provision that says no class actions.
What is the result? Big companies get away with stealing enormous sums of money a little at a time. They have done this by keeping consumers out of courts and by dividing and conquering.
The financial services industry spent millions and millions in lobbying trying to keep the Consumer Financial Protection Bureau from even coming into existence because they don’t want oversight. Now that it has, they will fight this rule with all they have. They already have an important ally, Jeb Hensarling, Republican of Texas, who is the Chairman of the House Financial Services Committee. He said the rule is “a big wet kiss to trial attorneys.” You know a politician’s arguments are weak when he has to justify his opposition by playing the evil, greedy trial lawyers card. It is very hard to justify on legitimate grounds denying consumers access to the best judicial system in the world while banks and credit card companies flood the dockets of our courts with collection suits against their customers. As folks used to say: “What’s good for the goose is good for the gander.”
Representative Hensarling and many other politicians seem to be tone deaf. The rise of Donald Trump and Bernie Sanders prove that the people are fed up with being taken advantage of by big business and the cozy relationship between business interests and politicians. Maybe this new rule is a fresh start in a different direction.
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