Advertiser Disclosure

Suing Banks Will Get Easier — if CFPB Rule Survives

Credit Card Basics, Credit Cards
With so many websites offering free financial tools, it can be hard to know whom to trust. At NerdWallet, we spend literally 1,000s of hours researching partner offers and following strict editorial integrity to match you with the perfect choice. We even share how we make money so you can enjoy our expert advice and researched recommendations with total clarity and confidence.
Suing banks arbitration CFPB rule

These days, if a bank treats you and other customers unfairly, you’re often barred from joining together and suing the bank.

That could soon change. The Consumer Financial Protection Bureau announced a final rule Monday generally prohibiting financial institutions from blocking class-action lawsuits with contract language that requires consumers to settle disputes out of court in an arbitration proceeding.

The contracts are agreements you sign to open an account, get a credit card, take out a loan and conduct other transactions with the firms. Most contracts include mandatory arbitration clauses, effectively protecting the companies from large judgments in class-action lawsuits. A class-action suit is one filed on behalf of a large number of people who were allegedly harmed by a defendant’s activities.

Lauded by consumer advocacy groups and condemned by banking groups, the CFPB rule could spell big changes for how consumers resolve disagreements with financial institutions. Here’s what you need to know about it.

The rule isn’t in effect and could still be blocked

When the CFPB announces a “final rule,” it sounds, well, final. But a lot still needs to happen before this rule takes effect.

Under current law, Congress has 60 days during which it can block the rule, the New York Times reports. U.S. Rep. Jeb Hensarling, a Texas Republican and the chairman of the House Financial Services Committee, already has said the rule should be rejected, according to the report. U.S. Sen. Tom Cotton, R-Ark., also says he’s drafting a resolution to allow Congress to eliminate the rule, according to a report from Reuters. Right now, the rule’s future seems uncertain.

Even if it isn’t blocked, the rule won’t go into effect right away. There’s a 180-day waiting period before financial institutions have to comply. So if the rule goes through, it won’t be fully implemented until 2018.

You won’t need to ‘opt in’ for this protection …

If the rule takes effect, you won’t need to do anything. You’ll have the option of participating in class-action lawsuits, which you may not have had before. Unlike individual lawsuits, class-action lawsuits often cause companies to change their business practices.

… but it won’t change existing agreements

The rule won’t change the terms on your existing accounts when (and if) it goes into effect. Instead, it will apply only to agreements you enter into after the “effective date” — that is, after that first 60-day waiting period. A study by The Pew Charitable Trusts found that 73% of the banks it surveyed in 2016 include class-action waivers in their contracts.

It applies to payday lenders, debt collectors and more

It seems that the CFPB’s rule was partly inspired by the actions of credit card companies and banks. The final rule mentions Wells Fargo several times, for example, noting that customers had complained about the bank’s employees opening fraudulent accounts in their names before it came to public attention. Those customers generally were blocked from bringing a class-action lawsuit, allowing the harmful practices to continue. 

The rule isn’t limited to banks and issuers. It also applies to companies that extend credit, make credit decisions, offer auto leases, provide debt management services, provide credit reports and collect debt. That includes payday lenders, debt collectors, private student lenders and certain auto lenders. 

You might soon be participating in more class-action lawsuits

Even if you aren’t interested in joining more class-action lawsuits, you may find yourself participating in them if the rule goes into effect. That’s because it often requires no effort on your part to be a part of a class-action lawsuit when you’re in the harmed group of consumers, that is, the “class” in class action.

Take, for example, a credit card company that charges a large group of consumers late fees in error and won’t refund the charges. If you’re affected by such a practice under a contract signed after this rule is implemented, and if someone brought a class-action lawsuit against the issuer, you’d likely get a notification and would generally be included in the complaint, unless you choose to opt out. If the suit was successful, you’ll get a small slice of the settlement.

You can still go to arbitration, if you want

If you still wanted to settle a dispute with your financial institution in arbitration, you would be able to do so. The new rule doesn’t take that option off the table. But if you choose that option after this rule is implemented, the CFPB will be paying attention to the outcome. The rule requires providers involved in certain arbitrations to provide records from arbitration to the CFPB, allowing it to monitor the fairness of these proceedings.

Claire Tsosie is a staff writer at NerdWallet, a personal finance website. Email: claire@nerdwallet.com. Twitter: @ideclaire7. Gregory Karp contributed reporting to this article.