Agency eyes removing barrier to lawsuits.
Aside from the obvious drawback of having to pay back the money, debt can entail various other problems, from being treated poorly by lenders to failing to understand the terms of a loan. WASHINGTON — The Consumer Financial Protection Bureau is getting closer to creating rules that would make it easier for consumers to sue banks, credit card issuers, and other companies selling financial products.The widespread practice by financial companies of embedding arbitration clauses into credit card and checking account service agreements, which block consumers from using courts to settle disputes, may be coming to an end. The proposals being considered target arbitration clauses — restrictions often included in the fine print of contracts for financial products such as credit cards, student loans, and checking accounts — that the average person knows little about. If enacted, the new rule will impact companies that fall within the CFPB’s broad interpretation of businesses that provide financial products and services for consumer purposes.
The relatively young federal agency, created in 2011 in the aftermath of the recession and financial-market meltdown, has been compiling complaints for just over four years. The clauses typically bar people from suing companies or joining class action lawsuits when legal issues come up, instead steering them into arbitration, a process that some critics say is often stacked in the company’s favor. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), enacted by President Obama in July 2010, requires that CFPB investigate pre-dispute arbitration clauses in consumer financial markets.
The announcement comes on the heels of the CFPB’s publication of a three-year study on arbitration that concluded that consumers generally are better served through litigation. According to CFPB Director Richard Cordray, arbitration clauses amount to “a free pass to sidestep the court and avoid accountability for wrongdoing.” The CFPB does not intend to ban all arbitration agreements in consumer contracts. If the retailer, or bank, decides to arbitrate and the outcome is not to your satisfaction, the consumer has given up the right to litigate the dispute in court, or have a jury trial–even if someone else has filed a class action lawsuit against the same business. The background stems from the 1925 Federal Arbitration Law, originally intended to allow companies doing business with each other to decide ahead of disputes to settle problems through arbitration instead of courthouse lawsuits. Mortgages still rank as a sore spot, accounting for 27.4% of the nearly 703,000 complaints received by the bureau since tracking started in July 2011.
Scott Laughlin, the Vice President of Consumer Credit Counseling Service of Buffalo also points out, arbitration rulings don’t have to be consistent, either. The goal of forcing disputes to be arbitrated instead of litigated was to streamline and lower the cost of resolving disputes that customers had with financial service providers. The bureau’s proposal would apply only to financial companies for agreements covering checking accounts and credit cards, plus consumer, student and payday loans, and other financial services, but not to the purchase of goods. A mandatory arbitration clause included in a contract allows the contracting party to require that the complainant settle any dispute that arises through a neutral third party, rather than in court.
Laughlin believes if consumers have the option of suing, banks might be more amenable to settling disputes fairly. “Whether it is a bank or just a credit card company, it will be better that the individuals will be able to work together when there are some things that just aren’t going the way they should be going.” Laughlin contends, restricting the use of arbitration clauses is a way of leveling the playing field for consumers, while consumers would still have the option of arbitration for their individual claim. “Work together to resolve some of the issues that they might be having that are more collective, rather than just specific to one person’s account–that is when arbitration might be most helpful, when it is just one.” A report from the CFPB, earlier this year, showed more than three-out-of-four consumers didn’t know whether their credit card agreements required arbitration. Companies who did not like how an arbitration firm would rule could shop around, giving arbitration companies a reason to rule in favor of the companies who hired them. If passed, businesses will be required to revamp arbitration clauses contained in their consumer contracts within 210 days after the rule is published.
Other mortgage issues are less obvious, such as consumers complaining that lenders won’t accept anything but the full amount owed or didn’t apply payments properly. But a bigger source of complaints recently has involved debt collection — issues such as improper contacts by lenders or attempts to collect on debt not owed. The investigation of mandatory arbitration clauses by CFPB found that over 80 million individuals agree to this contractual agreement in credit card markets alone. The proposal, which the agency announced Wednesday, follows years of scrutiny by financial regulators, state attorneys general and consumer financial advocates. “Companies can sidestep the legal system, avoid big refunds, and continue to pursue profitable practices that may violate the law and harm countless consumers,” said Richard Cordray, director of the CFPB, in a statement.
Debt-collection complaints have accounted for 25.5% of the overall volume since the bureau began tracking consumer feedback, but they’re topping the charts in 2015. In these consumer markets, about 600 arbitration cases are filed, and about 1,200 federal lawsuits are filed, by individuals seeking relief each year. The regulator is likely to face stiff resistance from the financial industry and the CFPB’s critics in Washington. “Forcing consumers to hire expensive lawyers and go to trial rather than use a low-cost dispute resolution system harms the very low and middle income consumers the CFPB should be helping,” said Rep. The bureau will not forbid companies from using arbitration clauses for individual disputes, but it proposes to block companies from forbidding class-action lawsuits.
Jeb Hensarling, R-Texas, who is chairman of the House Financial Services Committee. “This proposal is a tremendous step toward cleaning up a system that has heavily favored companies over consumers who were wronged,” said George Slover with Consumers Union, the public policy and advocacy arm of Consumer Reports magazine. Mary’s University Assistant Law Professor Ramona Lampley said, however, that financial companies will drop arbitration clauses altogether if they cannot stop class-action lawsuits. Gripes involving bank accounts and services — one of the few types not focused specifically around debt — weigh in around 10% of total complaints over the life of the program and 8% or so in recent months. Bank issues include low-balance fees and problems tied to deposits or withdrawals, account openings/closings, money orders and foreign-currency exchange.
Another proposal would force companies that continue to use arbitration to submit those claims to the CFPB, so the agency can monitor the process and make sure it’s fair to customers. In some cases, the bureau could require payment of additional thousands of dollars to individual customers who win arbitration claims, as an incentive to pursue arbitration. The professor said the bureau already has found, in an earlier, voluminous report on the issue, that 60 percent of consumer class-action lawsuits fail. Even when consumers win a class-action judgment, only 21 percent of the wronged consumers make claims on the settlement offers, suggesting the settlements are not providing the monetary relief consumers seek, Lampley said.
They shot up in 2011, 2012 and 2013 as the CFPB program got going and more people became aware of it, though the rate of increase has slowed. “We expect organic growth in complaints over time, as more people learn about us and how we might be helpful to them,” said Darian Dorsey, the bureau’s chief of staff in the office of consumer response. Under current rules, customers can be bound to use individual arbitration to resolve disputes, even in cases where many individuals were victims of the same practice. For consumers, pursuing individual lawsuits is typically a drawn-out and expensive process. “It is simply impossible to have an effective group claim where the vast majority of consumers have all lost their right to have their day in court,” Cordray said. Complaints vary considerably by geographic region, with the bureau receiving a lot more gripes from Mid-Atlantic states and relatively few from the South and Midwest. Adjusted for population, the District of Columbia has had by far the most complaints so far — 623 for every 100,000 residents — followed by Delaware, Maryland, Florida and New Jersey.
The bureau doesn’t collect demographic information on Americans lodging complaints, so it’s hard to say if people tend to gripe more based on age, gender, economic status or whatever. “We get more complaints from cities and populous states, which might reflect more awareness of the bureau in those places,” said Dorsey. Part of the motivation behind the complaint process is to help consumers connect with financial companies, with the possibility of getting their problems resolved. Consumers sometimes receive financial compensation, such as fee reductions, or other relief, such as incorrect information removed from their credit reports.
Monetary relief came in 20% or more of the cases involving credit cards, prepaid cards and bank accounts/services in 2014, according to a CFPB report to Congress.