Consumers may soon be able to get their day in court to settle disputes with lenders and credit card companies.
The Consumer Financial Protection Bureau issued a proposed rule Thursday that would allow more people to take their credit card and loan complaints to court, rather than being forced to argue their cases in front of closed arbitration panels.
But finance industry representatives sharply criticized the new rule, which would give consumers an option for redress besides the arbitration clauses commonly found in banks’ fine print. They said that would lead to frivolous lawsuits and warned the bureau should expect a legal challenge.
The bureau hosted a field hearing Thursday in Albuquerque, where regulators outlined the rule, and then heard spirited debate among speakers and panelists at the Albuquerque Convention Center.
New Mexico Attorney General Hector Balderas and representatives of consumer groups, both statewide and national, said people should be able to join class actions if they feel they’ve been harmed.
“Signing up for a credit card or opening a bank account can often mean signing away your right to take the company to court if things go wrong,” bureau Director Richard Cordray said. “Many banks and financial companies avoid accountability by putting arbitration clauses in their contracts that block groups of their customers from suing them.”
“There’s only one winner coming out of this rule: the plaintiff’s class action bar,” countered Alan Kaplinsky, head of the consumer finance practice at the law firm Ballard Spahr. “It’s not good for the industry, for banks or for nonbanks. And consumers are going to be net losers.”
Millions of contracts include provisions that bar consumers from bringing group suits and companies have used the clauses to keep fights out of court almost two-thirds of the time, the CFPB found in a study released last year. Very few consumers bring, or even consider, individual actions against their financial service provider in court or in arbitration, the study showed.
The regulator’s proposal would cover new agreements for products such as credit cards, auto loans, credit reports and even mobile phone services that provide third-party billing.
There will be a public comment period for 90 days before the CFPB can issue a final rule.
The soonest it could take effect is mid-2017 and companies would then have 210 days to comply with the requirements.
Companies could still include arbitration clauses in contracts, but they would have to state that those cannot be used to stop individual consumers from joining a class-action case. Companies that do have arbitration clauses will be required to submit some related information to the CFPB, the bureau said.
Some players, such as credit unions, which are member owned, may be looking for exemptions.
“Credit unions don’t need to be tarred with this brush,” said Kevin Hammar, a representative of the Nevada Credit Union League. “Many credit unions are justifiably leery of a loss of members’ money to fund legal defense funds.”
Hammar was on the panel with Paul Bland of Public Justice; Deepak Gupta of Gupta Wessler PLLC; Christine Hines of the National Association of Consumer Advocates; Kaplinsky of Ballard Spahr LLC; and Travis Norton of the U.S. Chamber of Commerce.
Lawsuits challenging the rule are probable, said Kaplinsky.
Financial services companies and groups including the U.S. Chamber of Commerce have argued arbitration is a valuable tool to help avoid frivolous, expensive lawsuits that often don’t do much to benefit borrowers.
The finance industry argues that curbing arbitration will result in higher legal costs that banks will ultimately pass on to consumers in the form of higher fees and reduced services, said Norton.
All the major financial industry lobby groups announced their opposition to the CFPB proposal in prepared statements on Thursday.
The Associated Press contributed to this report.