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CFPB To Shift Tide In Lender Vs. Consumer Disputes?

The CFPB has unveiled proposals that would let consumers band together in class action suits against lenders. That would eliminate mandatory arbitration. Don’t expect the lenders to give in without a fight.

Could the tide of legal battle be shifting away from lenders?

The Consumer Financial Protection Bureau has proposed rules that would offer borrowers a bit more ammunition if and when they have disputes with lenders, ranging from banks to credit card companies. The proposals would expand borrower rights to be able to sue those organizations via class action, where traditionally they have been bound by contract to mandatory arbitration.

The CFPB said Wednesday (Oct. 7) that through the Dodd-Frank Act, passed in 2010, it had been charged with studying the impact of contract clauses that effectively kept consumers from using the court system to resolve disputes.

In the wake of that study, said the CFPB, it unveiled the proposals, currently under consideration, that would make it illegal for many lenders to have contract clauses signing away the right to class action.

The “ban on the ban” would apply to a range of financial products, from credit cards to checking accounts to auto loans and student loans.

The arbitration clause, a legal tactic used by huge swaths of the financial industry, traces its use to a series of Supreme Court decisions that held that federal policies promoting arbitration trump state laws giving consumers the right to sue lenders.

As part of its own argument for lifting mandatory arbitration, the CFPB said that it had studied the impact of arbitration and, in March of this year, issued a report to Congress that found that a majority of consumers, as many as three out of four, did not know whether or not various contracts they had signed were indeed covered by arbitration clauses. And only 7 percent of those surveyed knew that the arbitration clauses effectively short-circuited their right to seek redress in court.

In terms of class actions that actually did go through, 6.8 million consumers received roughly $220 million in class action settlements.

The arbitration tactic is so widespread, the CFPB said, that “tens of millions” of consumers are affected, amounting to 53 percent of the credit card market and 44 percent of the checking account industry.

The next step in the process is for the CFPB to gather a panel of small business owners to help provide feedback on the proposals, which will then lead to a formal rule, which then leads to public comments. As The Wall Street Journal noted, there’s no clear determination as to when any final rule would be put in force.

It’s unlikely that such a sweeping change to the way lenders joust with consumers would be met without a fight from the financial industry. And their argument, according to WSJ, is that arbitration is both faster and more cost-effective than class action options.

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