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CFPB Issues New Rule Governing Arbitration Clauses

The products and services many consumers purchases include contractual agreements with arbitration clauses, which prohibit consumers from getting relief by joining class-action lawsuits. Those clauses also specify the out-of-court process to resolve disagreements and the upfront fees consumers must pay.

Many you have heard of the phrase, "binding arbitration." Regular readers of this blog are familiar with the issues with binding arbitration. Many popular mobile apps, websites, streaming video services, and some augmented-reality (AR) mobile games contain these clauses. The Public Citizen website lists the banks, retail stores, entertainment, online shopping, telecommunications, consumer electronics, software, nursing homes, and health care companies that include binding arbitration clauses in their contracts with customers.

To achieve a better balance between the needs of consumers versus the needs of corporations, the Consumer Financial Protection Bureau (CFPB) has issued new rules governing arbitration clauses. The CFPB explained:

"No matter how many people are harmed by the same conduct, most arbitration clauses require people to bring claims individually against the company, outside the court system, before a private individual (an arbitrator). Companies know that people almost never spend the time or money to pursue relief when the amounts at stake are small, so few people do this. Our new rule will restore the ability of groups of people to file or join group lawsuits. In some cases, not only will companies have to provide relief, they will also have to change their behavior moving forward.

People who would otherwise have to go it alone or give up, will be able to join with others to pursue justice and some remedy for their harm."

Richard Cordray, the Director of the CFPB, in a statement briefly discussed the history:

"Originally, arbitration was primarily used for disagreements between two businesses. But over the last quarter century or so, companies started adding arbitration clauses to their consumer contracts... In 2007, Congress passed the Military Lending Act, which disallows mandatory arbitration clauses in connection with certain loans made to servicemembers. Three years later, in the Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress went further and banned mandatory arbitration clauses in most residential mortgage contracts."

Supporters of binding arbitration clauses have long fought pro-consumer action by the CFPB. Director Cordray also discussed the new CFPB rule:

"A cherished tenet of our justice system is that no one, no matter how big or how powerful, should escape accountability if they break the law. But right now, many contracts for consumer financial products like bank accounts and credit cards come with a mandatory arbitration clause that makes it virtually impossible for people to sue the company as a group if things go wrong. On paper, these clauses simply say that either party can opt to have disputes resolved by private individuals known as arbitrators rather than by the court system. In practice, companies use these clauses to bar groups of consumers from joining together to seek justice by vindicating their legal rights..."

"The breadth and application of these clauses can be unexpected and severe. For example, when Wells Fargo opened millions of deposit and credit card accounts without the knowledge or consent of consumers, arbitration clauses in existing account contracts blocked their customers from bringing group lawsuits for the unauthorized account openings. Companies have argued that group lawsuits are unnecessary because the government can pursue enforcement actions to address the same problems. But consumers should be able to stand up for themselves and pursue their own legal rights without having to wait on the government. And the government has limited resources..."

The CFPB also produced this video:

What are your opinions of binding arbitration clauses? Were you aware of them? What are your opinions of the new CFPB rule?

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