A bill currently sitting on President Trump’s desk would drastically limit the rights of consumers to file lawsuits against banks, credit card companies, and other lenders.
The legislation was approved by the U.S. Senate (link to article) in what is seen by many as a major blow to the authority of the Consumer Financial Protection Bureau. In 2015, the consumer bureau, a federal watchdog which has been tasked with monitoring the nation’s financial institutions since the financial crisis, finalized a rule that gave consumers the legal right to file class action lawsuits against banks and lenders. That rule was intended to provide an avenue for consumers to seek redress when a minor dispute didn’t justify the high cost of seeking justice through individual lawsuits or through arbitration. Instead, consumers could join together (as a “class”) in the same lawsuit and seek redress through the legal system.
For years prior to the implementation of this rule, US banks managed to avoid class action suits by including mandatory arbitration requirements in consumer agreements. Needless to say, the new rule did not sit well with lending institutions – and they began to lobby Congress to roll back the rule change.
The Consequences of Allowing Banks to Impose Mandatory Arbitration Requirements
If, and when, President Trump approves the bill – as he is expected to do – financial institutions will greatly benefit. That’s because they will no longer be exposed to class action lawsuits in civil court. This could have major implications for consumers who were affected by the recent Wells Fargo fake account scandal and the recent Equifax data breach. (Some estimates indicate that as many as 145 million Americans may have had their personal data compromised by the cyberattack on Equifax.) Those consumers would no longer be able to join class action lawsuits against the potentially liable financial institutions. Instead, consumers would have to rely on arbitration.
So, what is the bottom line for consumers? Consumer Financial Protection Bureau Director Richard Cordray believes that the new law “preserves a two-tiered justice system” that provides banks and lenders with a major advantage over consumers in legal disputes. For some perspective, consider that there were 411 cases against banks and lenders in the U.S. between 2010 and 2012. (These cases involved disputes over credit cards, checking accounts, student loans, and other types of loans.) The total amount of relief provided by arbitrators was $361,540. During the same time period, there were 187 class action lawsuits filed against banks under similar circumstances. Those cases resulted in settlements totaling approximately $1.6 billion. This is a significant financial difference that should underscore precisely why banks prefer mandatory arbitration to class action lawsuits when disputing claims by consumers.
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