Proposed Rule to Strengthen Class Actions

Consumer watchdog, the Consumer Financial Protection Bureau, submitted an ambitious proposal for public comment this Thursday. The proposed rule would greatly limit the ability of large banks "to bar the consumer from filing or participating in a class action with respect to the covered consumer financial product or service."

In short, the new rule would keep banks and other financial institutions from locking customers into contracts that restrict legal recourse for contract violations and hidden or unfair costs— specifically it allows credit and debit card holders to take part in class action lawsuits against their banks. In their summary, the bureau states

"[Pre-dispute] arbitration agreements are being widely used to prevent consumers from seeking relief from legal violations on a class basis, and that consumers rarely file individual lawsuits or arbitration cases to obtain such relief."

A bureau report shows that arbitration decisions tend to favor institutions at the expense of consumers. Between 2010 and 2011, arbitration agreements awarded $2.8 million to businesses compared to just $400,000 to consumers.

This report indicates that credit and lending institutions in particular are using arbitration agreements to shield themselves from consumer backlash concerning overage fees, late fees, and hidden charges. It also shows that consumers rarely enter arbitration for small claims, with only 505 consumers between 2010 and 2014 going to arbitration over claims of $2,500 or less. This means that banks are operating on a de facto honor system when it comes to small violations of their terms of service, and the bar against class actions keeps them from being held accountable to the public at large. A civil court is the one place where, at least in theory, an average person stands on equal ground with a large corporation, and thus since the early 2000's more and more companies have used arbitration agreements to keep consumers out of court.

Class actions enable a large group of consumers to make each of their small claims into one big claim against the company. And these suits are often the only way to hold companies accountable for the small things they think they can get away with. The bureau make their concerns clear in the proposal:

"The use of arbitration agreements in such contracts has become a contentious legal and policy issue due to concerns about [...] whether arbitration has proved to be a fair and efficient dispute resolution mechanism, and whether arbitration agreements effectively discourage the filing or resolution of certain claims in court or in arbitration."

The bureau, formed in 2010 as part of the Dodd-Frank Act, is taking a hard stance on financial institutions who have made themselves unaccountable to the American people through legalese and lack of oversight. As arbitration agreements have become ubiquitous in both consumer and employment law, the bureau is making sure ordinary people still have a voice in the courts.

The proposed rule would be a check to the power of the financial industry, which was one of the intentions behind the passage of Dodd-Frank. Many consider checks and balances to the influence of overzealous investment banks key to avoiding the next financial crisis.

Still, it is expected that the proposal will meet with harsh criticism from the financial sector, their lobbyists, and their lawyers. The U.S. Chamber of Commerce, for instance, which despite its name is in no way an affiliate of the U.S. government, has already released a statement attacking the proposal, calling it "the biggest gift to plaintiffs’ lawyers in a half century."

The Chamber is a lobby group which spent over 60 million dollars in 2015, and $136 million during the 2012 election year, to push legislation that benefits large financial institutions at the cost of democratic oversight.

This proposal comes at a time when public trust in banks remains low and increasingly visible segments, like those who support Bernie Sanders, are railing against corporate greed and irresponsibility— even those on the other side of the aisle are tired of corporations that send jobs overseas and stifle competition.

Perhaps the banks have reason to worry, with the federal reserve considering not if, but when and how, to raise interest rates. The heady salad days of investment banks, sub-prime loans, and overdraft fees may finally be coming to an end.

As always, thank you for reading. If you or someone you know has a workplace dispute, and would like to file a legal complaint, then don't hesitate to contact one of our knowledgeable employment lawyers today.