Big Changes Afoot to Protect Consumers - Like You

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By Marilyn Lewis

If you've signed a contract recently, chances are good that you signed away your right to sue if something goes wrong with the product or service you purchased. That could change, though. The Consumer Financial Protection Bureau said this week that it is looking at restoring consumers' right to join class-action lawsuits -- at least those targeting the financial services companies that the bureau oversees.

Signing away rights. Consumers are on the losing end when companies insert agreements, called "mandatory arbitration clauses," in the fine print of their consumer contracts. Signers must agree, if they have a complaint or injury, not to go to court but instead to use an arbitrator. As Money Talks News founder Stacy Johnson says, "Arbitration is simply a way for big companies to keep you out of court."

You may have signed an arbitration agreement and not realized it when you subscribed to a cable service, opened a bank account or a credit card, entered a nursing home, bought a home warranty, joined a gym or signed up for an online dating service. You might even have signed one when you took a job, entered a hospital or bought tickets to a sports event. Public Citizen, the consumer protection nonprofit, lists many familiar companies using forced arbitration clauses in their consumer agreements. The list includes DropBox, Vanguard, Orkin, Golds Gym, Verizon, AT&T, Direct TV, TimeWarner, US Bank, Wells Fargo, Chase, American Express, Sallie Mae, Discover, Toshiba and X Box Live.

Class-action suits are powerful. The bureau, at a hearing in Denver, announced that it is considering changing its rules and outlawing companies' use of arbitration clauses to prevent consumers from filing or joining class-action lawsuits.

Class-action suits, a tool historically used by injured or aggrieved consumers or employees to sue on behalf of an entire group, have a long history in the United States. The lawsuits have been employed as a tool for change by civil rights, environmental, employee and consumer groups.

Change limited to financial products. The CFPB rule change, if passed, would affect only products under the jurisdiction of CFPB. Those include credit cards, checking and deposit accounts and some auto loans, small-dollar or payday loans and private student loans and possibly other financial services.

The rule wouldn't ban arbitration clauses altogether. Individuals still could be prevented from taking claims to court. Only class-action suits would be affected. In practice, though, "companies rarely use their arbitration clauses to block consumers from suing them in individual cases," bureau director Richard Cordray said at the Denver hearing.

It's not typically worthwhile for consumers individually to sue to challenge relatively small fees and charges -- excessive bank overdraft charges, for example -- even if the fees seem unfair or illegal and they reap enormous profits when companies apply them to many consumers.

The gains. The bureau studied the issue and the effectiveness of class-action suits and issued a report in the spring. "[B]y examining five years of data, we found that group lawsuits delivered, on average, about $220 million in payments to 6.8 million consumers per year in consumer financial services cases," Cordray said.

A rule change could produce three gains, he told the hearing:
  • Consumers would have due process, or their day in court, as guaranteed by the Constitution.
  • Class actions have the power to prevent wrongdoing on a large scale by demonstrating the potential cost in money and bad press of violating consumers' rights. "A substantial monetary award can lead a company to rethink its practices by reassessing its bottom line," Cordray said.
  • The proposed rule change would require companies to report their arbitrations and the results to the bureau, exposing their practices to "the sunlight of public scrutiny," the director said.
He added:

The central idea of the proposals we are considering is to restore to consumers the rights that most do not even know had been taken away from them. ... Under the approach we are considering, companies would not be able to tip the scales in their favor by writing their own free pass to the detriment of consumers.

Few realize what they've signed. In a March news release announcing the study's conclusion, Cordray said:

Tens of millions of consumers are covered by arbitration clauses, but few know about them or understand their impact. ... Our study found that these arbitration clauses restrict consumer relief in disputes with financial companies by limiting class actions that provide millions of dollars in redress each year.

The bureau points to the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 as the source for its authority on the crackdown. The rule-change process will not happen before January at the earliest.

Representatives of the small business community, the Office of Management and Budget and the Small Business Administration, will take part in the decision. Comment from industry groups, consumer groups, and other federal and state regulators and enforcement authorities will be encouraged as well as a 60-day period for the public to comment.

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