WASHINGTON – The government’s consumer watchdog finalized a rule Monday that will make it easier for people to challenge financial companies in court.
Under the long-awaited rule from the Consumer Financial Protection Bureau, companies will be banned from using agreements that block consumers from joining group lawsuits. The rule also aims to increase awareness about how consumers fare when they go to arbitration, since companies will be required to report those outcomes to the CFPB.
“In practice, companies use these clauses to bar groups of consumers from joining together to seek justice by vindicating their legal right,” said Richard Cordray, director of the Consumer Financial Protection Bureau, during a call with reporters.
The agency is targeting arbitration clauses, little known agreements that are frequently tucked into the fine print for credit cards, bank accounts and other consumer products. As a condition for doing business, consumers often have to sign away their right to join a class-action lawsuit, agreeing instead to settle any disputes in a private process known as arbitration.
Cordray acknowledged Monday that the rule, which doesn’t ban arbitration clauses completely, is likely to face fierce opposition from Republicans seeking to “nullify” the regulation.
The final rule was announced at a time when the Trump administration is undergoing a broad effort to overhaul Obama-era regulations affecting other aspects of consumers’ financial lives, including their health insurance, overtime pay and the investment advice they receive when saving for retirement.
Supporters of the approach say the clauses can help companies and consumers save money by minimizing legal costs. They also say that many consumers have their disputes resolved fairly through arbitration, sometimes receiving more relief when they go through arbitration than when they take part in class-action lawsuits. “This is a boon to the trial lawyers and a bust for consumers,” Richard Hunt, president of the Consumer Bankers Association that represents retail banks, said in an interview.
Cordray said Monday that class-action lawsuits can help increase awareness about harmful business practices that might not receive much attention when they are addressed through arbitration, since companies were not previously required to report those cases. The director also said class-action lawsuits can be a way for consumers to seek relief when they are owed small dollar amounts and cannot afford to hire a lawyer. “Very few people have the time or the money to fight on their own over a small amount of money,” Cordray said.
The CFPB, which was created under the Dodd-Frank Act, is facing intense scrutiny from Republicans and business groups who are calling for Cordray to be fired and who argue that the agency has too much power. The agency is awaiting a decision on a court case that centers on whether the president should be able to fire the agency’s director at will, as opposed to the current structure that says the director can only be removed for cause.
The agency has stayed busy since the election, rolling out enforcement actions against companies that it says have misled or overcharged consumers. The targets included well-known names, such as the credit reporting bureau Experian, mortgage company Ocwen and student loan servicer Navient.
The rule is expected to be published in the federal register in the next week or two. It will take effect 241 days, or about eight months, after that.