Regulator moves against mandatory arbitration agreements

WASHINGTON – A new rule from the Consumer Financial Protection Bureau (CFPB) will stop banks and credit card companies from forcing customers to arbitrate grievances over products.

Fine-print clauses in hundreds of millions of consumer agreements once kept customers from participating in class-action suits and forced them to submit to the irreversible decisions of company-appointed arbitrators in closed hearings.

A CFPB rule issued Monday would let consumers join with one another in class actions. The rule applies to contracts entered into more than 240 days after it is published in the Federal Register, the CFPB said.

Banks and credit card companies lobbied hard against the new rule, and CFPB director Richard Cordray acknowledged that opponents might seek a law in Congress to overturn it.

Mandatory arbitration clauses "allow companies to avoid accountability by blocking group lawsuits and forcing people to go it alone or give up," Cordray said in a news release. "Our new rule will stop companies from sidestepping the courts and ensure that people who are harmed together can take action together."

The American Bankers Association (ABA) expressed strong disagreement:

Consumers "fare better in arbitration," the ABA said in a statement. "Consumers receive nothing at all in nearly nine out of 10 class-action lawsuits."

The ABA said the new rule "would essentially eliminate arbitration — and force consumers into court — by requiring companies to face a flood of attorney-driven class-action lawsuits from which consumers receive virtually nothing. Under this final rule, consumers lose."

John Berlau of the Competitive Enterprise Institute, a free-market think tank, said that CFPB "disregarded vast data showing that arbitration more often compensates consumers for damages faster and grants them larger awards than do class-action lawsuits."

The Financial Services Roundtable, run by former Minnesota Gov. Tim Pawlenty, did not immediately respond to a request for comment.

Sen. Al Franken of Minnesota, who helped lead the charge against mandatory arbitration clauses, called the new rule a "game-changing move."

It "will help shift power back to the American consumer and help ensure that you don't have to sign away your rights when you sign up for a credit card or checking account, take out a private student loan or borrow from a payday lender," Franken said in a statement.

Franken worked for years on what he considered the inequity of mandatory arbitration. He helped get the issue studied as part of the Dodd-Frank Wall Street reform bill passed in response to the Great Recession.

One of his latest efforts to keep the issue in the public eye involved former Miss America Gretchen Carlson of Minnesota who had to fight an arbitration clause in her Fox News contract when she brought sexual harassment charges against the network's founder, Roger Ailes. Carlson succeeded and reportedly won a $20 million settlement.

Those who are not celebrities have a much harder time avoiding mandatory arbitration. Wells Fargo Bank's creation of millions of unapproved customer accounts brought to light what consumer groups called the absurdity of mandatory arbitration. People with fake accounts were not allowed to pursue a class-action suit and were forced into the arbitration process.

The consumer group Public Citizen referenced the Wells situation in praising the CFPB's action.

"Since most consumers cannot afford to take on a big corporation on their own, banks like Wells Fargo get away with ripping off large numbers of customers," Amanda Werner, arbitration campaign manager with Americans for Financial Reform and Public Citizen, said in a statement. "This new rule will help prevent this kind of widespread fraud and ensure consumers can fight back."

Jim Spencer • 202-662-7432