TheMReport

Nov. 2015-Opportunity Knocks

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60 | Th e M Rep o RT O r i g i nat i O n s e r v i c i n g a na ly t i c s s e c O n da r y m a r k e t SECONDARY MARKET the latest SECONDARY MARKET cFPB may allow consumers to Bring about class action lawsuits Companies may face new restrictions on arbitration clauses. t he Consumer Finan- cial Protection Bureau (CFPB) announced in October it is consider- ing proposing rules that will make consumer financial com- panies more accountable to the customers they serve. The bureau is considering a proposal that would prevent financial firms from using "free pass" arbitration clauses that would prevent consumers from bringing class action lawsuits to obtain relief, according to an announcement from the CFPB. These arbitration clauses are typically buried in contracts for consumer financial products and deny consumers the right to sue companies in groups. Companies can use the "free pass" to avoid class action lawsuits from con- sumers that would require them to hand out big refunds. "Consumers should not be asked to sign away their legal rights when they open a bank account or credit card," CFPB Director Richard Cordray said. "Companies are using the arbitration clause as a free pass to sidestep the courts and avoid accountability for wrongdoing. The proposals under consideration would ban arbitration clauses that block group lawsuits so that consumers can take companies to court to seek the relief they deserve." Contracts for consumer financial products and services (such as bank accounts or private student loans) often include arbitration clauses that typi- cally state that the company or consumer can require disputes about the product to be resolved by privately appointed arbitrators instead of through the courts. Generally, either side can block a lawsuit from proceeding by in- voking such a clause, the clause can also bar consumers from bringing group claims through the arbitration process, according to CFPB. Since these arbitration clauses are contained in a wide range of consumer financial products, the clauses affect tens of millions of consumers, according to CFPB. In essence, the arbitration clauses force consumers to resolve their claims against companies indi- vidually, which few consumers end up doing, instead of as part of a group lawsuit. Congress requires the CFPB, Dodd-Frank Wall Street Reform and Consumer Protection Act, to study the use of arbitration clauses in consumer financial markets. The CFPB is permitted by Congress to issue regulations in the public interest to protect consumers. The findings of the CFPB's report, issued in March 2015, showed that consumers' relief for disputes with financial service providers are restricted because companies use the arbitration clauses to block class action lawsuits. The study also found that the majority of consumers did not even know the arbitration clauses existed. For example, in the credit card market, 75 percent of consum- ers did not know whether their contract contained an arbitration clause, and fewer than 7 percent of consumers surveyed knew the arbitration clauses restricted their ability to bring litigation against the company. According to the CFPB, the proposals being considered would not ban arbitration clauses entirely but would require the clauses to explicitly say they do not apply to class action lawsuits unless and until the court denies the class certification or the court dismisses the class claims. The benefits of the proposals include: • A day in court for consumers. The proposals would allow consumers to have their day in court to hold companies ac- countable for wrongdoing. • Deterrent effect. The proposals would give companies an in- centive to comply with the law in order to avoid litigation. • Increased transparency. The proposals would make the arbi- tration more transparent by re- quiring companies that invoke the arbitration clauses to submit claims filed and awards issued to the CFPB in arbitration.

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