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Why mandatory arbitration clauses are so onerous for consumers - II

Last week, out blog began discussing how clauses dictating that legal disputes must be resolved in private arbitration rather than the courts are buried deep within the language of many contracts, particularly those proffered by the financial industry.

We also discussed how these clauses can prove both limiting and damaging to consumers, and how the Consumer Financial Protection Bureau, the embattled federal agency created back in 2010, recently adopted a rule designed to address this very issue.

What exactly would the CFPB's rule do?

Under the new rule, which would theoretically take effect within 60 days of its publication in the Federal Register, the financial industry -- bank and credit card companies namely -- would no longer be able to force customers into mandatory arbitration. In other words, consumers would be free to pursue class action lawsuits.

It's important to note, however, that the rule would only apply to those financial entities subject to CFPB oversight and wouldn't apply to existing accounts. However, experts indicate that this could be circumvented by paying off existing debt and opening new accounts.

Furthermore, arbitration clauses contained in nursing home contracts and employment contracts wouldn't be affected.

Is the rule necessary?

A 2015 report by the CFPB determined that during the period under study, a mere 78 arbitration claims were resolved in favor of the consumer and that the total relief granted was only $400,000. In addition, a New York Times investigation revealed that only 505 consumers proceeded with arbitration from 2010 to 2014 over disputes involving $2,500 or less.

Experts indicate that class action lawsuits in general are meant to help a large group of people recover relatively small sums and, more significantly, help push financial firms to address dubious practices.

Will the new rule take effect?

The fate of the CFPB's new rule is uncertain given the current push on Capitol Hill to loosen financial industry regulations.

While the GOP-controlled Congress could push to overturn the rule via the Congressional Review Act, observers have indicated that this might not be the best move given its populist appeal.

Stay tuned for updates …  

Consider speaking with an experienced legal professional to learn more if you have questions or concerns relating to the enforcement of your consumer rights.

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