The U.S. Treasury Department released a report this week that examines the Consumer Financial Protection Bureau’s (CFPB) proposal to eliminate the arbitration clause, allowing consumers to file class-action suits against banks and credit card companies.
The CFPB found that forced arbitration clauses that prohibit consumers from entering class action lawsuits against companies are commonplace in financial product contracts. Most arbitration clauses require people to bring claims individually against the company, outside the court system, before a private individual (an arbitrator).
The CFPB said this makes it more difficult for consumers to hold banks accountable for misconduct. Detractors said consumers who go through arbitration gain more favorable outcomes than those who file class action lawsuits.
The Treasury report looked at whether prohibiting arbitration clauses would advance consumer protection or serve the public interest.
It found that the rule will impose extraordinary costs—generating more than 3,000 additional class action lawsuits over the next five years, imposing more than $500 million in additional legal defense fees, and transferring $330 million to plaintiffs’ lawyers.
The report added that CFPB’s data show that the vast majority of class action lawsuits deliver no relief to the class—and that consumers very rarely claim relief available to them. The CFPB also did not show that its rule will achieve a necessary increase compliance with the federal consumer financial laws, despite the rule’s costs, the Treasury report added.
In addition, the report said the CFPB failed to consider less onerous alternatives to its ban on mandatory arbitration clauses across market sectors.