The right to sue your bank may soon be restored

A proposed rule will bring back the class-action lawyers “Arbitration is just not doing anything for consumers”

Have you ever been charged a fee on your bank account that you thought was unfair? Or not gotten the cash rebate you expected on a credit card purchase? Or seen the rate on a shortterm loan shoot up for reasons you didn’t understand?

You might have a case to make, you might not—but either way, it may be hard to get that case heard in court. Customer agreements for credit cards, bank accounts, payday loans, and other financial products often include terms that require disputes to go through private arbitration. That’s about to change if a U.S. regulator has its way.

The Consumer Financial Protection Bureau proposed a rule on May 5 that would restore the right for people to join together in classaction lawsuits when they feel they’ve been wronged by a financial institution. “Many banks and financial companies avoid accountability by putting arbitration clauses in their contracts that block groups of their customers from suing them,” the agency’s director, Richard Cordray, said in a statement.

Consumer advocates say class actions are an essential tool to help the public win relief and to hold companies accountable for bad behavior. Industry groups argue that curbing arbitration clauses will result in more frivolous lawsuits and higher legal costs that banks will ultimately pass on to consumers.

“There’s only one winner coming out of this rule: the plaintiffs’ class action bar,” says Alan Kaplinsky, head of the consumer finance practice at Ballard Spahr, who’s represented banks and played a role in the rise of using arbitration clauses in contracts.

About half of outstanding credit card loans were subject to arbitration clauses in 2013, the CFPB found in a study released last year. Few consumers bring, or even consider, individual actions against their financial service provider in court or in arbitration, the study said. In arbitration, individuals must square off on their own against the company they believe wronged them, instead of sharing resources and building a case with others in a class action. “The whole point of these arbitration clauses in consumer finance is to kill the claims,” says Deepak Gupta, a lawyer at Gupta Wessler who previously worked at the CFPB. “The proof is in the pudding. Arbitration is just not doing anything for consumers.”

The regulator’s proposal would cover new agreements for products such as credit cards, auto loans, and credit reports. There will be a public comment period for 90 days before the regulator issues a final rule.

The soonest it will likely take effect is mid-2017, since companies will have 210 days to comply with the requirements. Companies will still be able to include arbitration clauses in contracts, but they must state that they can’t be used to stop individual consumers from joining a class-action case. Lawsuits challenging the rule are expected.

The arbitration rule is one of the biggest initiatives the CFPB has