WASHINGTON -- The Consumer Financial Protection Bureau on Monday banned banks and other financial services companies from including mandatory arbitration clauses in contracts to prevent consumers pursuing claims of wrongdoing from joining class-action lawsuits.
The rule could have a wide-ranging impact on major financial services providers, including automaker's captive finance units and other auto lenders.
The CFPB said the sweeping rule "applies to the major markets for consumer financial products and services overseen by the Bureau, including those that lend money, store money, and move or exchange money."
The rule was proposed in May 2016.
"Arbitration clauses in contracts for products like bank accounts and credit cards make it nearly impossible for people to take companies to court when things go wrong," CFPB Director Richard Cordray said in a statement Monday. "These clauses allow companies to avoid accountability by blocking group lawsuits and forcing people to go it alone or give up. Our new rule will stop companies from sidestepping the courts and ensure that people who are harmed together can take action together."
Under the rule, credit issuers may still use arbitration to resolve disputes if certain steps are followed, but they cannot force consumers to give up their right to file or participate in multiparty civil suits. Individuals currently can file cases in small claims court but often find the time and cost involved aren't justified when the claims are small, CFPB officials say.
A March 2015 CFPB study showed that credit card issuers representing nearly half of all credit card debt and insured bank deposits used mandatory arbitration clauses, but three out of four consumers surveyed did not know whether their credit card agreement included such terms.
Class-action waivers allow financial services companies to avoid big payouts covering everyone harmed. According to the study, more than 34 million consumers received payments and $1 billion was refunded to consumers over a five-year period. Conversely, in about 1,000 cases over a two-year period, privately appointed arbitrators awarded a combined total of about $360,000 in relief to 78 consumers.
The agency said class-action lawsuits also help prevent harm to other consumers by forcing companies to change unethical or unlawful behavior. They also serve as a deterrent because companies know they are more likely to be held accountable for their business practices.
"Without group lawsuits, private citizens have almost no way, on their own, to stop companies from pursuing profitable practices that may violate the law," the CFPB said.
Free-market advocates and the financial services industry said that arbitration is better at compensating victims faster and with larger awards than class-action suits.
"The CFPB's study clearly demonstrates that the winner in class-action litigation is almost always the plaintiff's attorneys, who pocket millions of dollars and leave the consumer with little to no financial compensation," Bill Himpler, executive vice president of the American Financial Services Association, said in a statement.
The rule will go into effect within 60 days of publication in the Federal Register this week and applies to contracts entered into six months after that date.
Republicans in Congress are working on legislation to curtail the CFPB's powers, which many view as an example of regulatory overreach that adds costs for consumers. CFPB reforms are included in the Financial Choice Act, which passed the House last month.