Amid growing anger at Wall Street, a push to end arbitration agreements

The nation's consumer watchdog is hoping to curb a practice that requires customers who sign up for a bank account, credit cards, and many other products to often unknowingly waive their right to settle disputes in court.  

The proposal, introduced Thursday by the Consumer Financial Protection Bureau (CFPB), comes amid a long-simmering effort by lawmakers and regulators to bring more attention to the mandatory agreements consumers sign that stop them from pursuing a class action suit, and require them to pursue disputes through arbitration instead. 

"Signing up for a credit card or opening a bank account can often mean signing away your right to take the company to court if things go wrong," CFPB director Richard Cordray said in a statement.

While anger at what critics say is the unchecked power of Wall Street has often taken center stage during this year's presidential election, particularly buoyed by the candidacy of Sen. Bernie Sanders (I) of Vermont, issues of justice and fairness in arbitration proceedings have mostly been quietly debated by regulators.

But the Bureau hopes to change that, partly by drawing attention to the prevalence of arbitration agreements, which require consumers to settle disputes through often highly secretive arbitration panels.

Although tens of millions of consumers may be impacted by arbitration, 75 percent don't know if their credit card is subject to an arbitration clause, the CFPB said in a report last year.

The proposal, which has been opposed by industry groups, wouldn't ban arbitration entirely but would instead stop the practice of barring consumers from joining a class action suit.

Industry groups argue that consumers are more likely to benefit from arbitration than class-action lawsuits, which they say can yield relatively small sums for individuals. But they have also acknowledged that the clauses allow them to avoid costly court battles with consumers that can sometimes yield million-dollar judgments.

"Companies, in general, believe they have an advantage over consumers in court," Alan Kaplinsky, a partner at the law firm Ballard Spahr, told the Los Angeles Times. "If a consumer wants to go to court, they have to take time out from work. Cases last longer [than in arbitration]. That's good. Companies like to drag things out."

"What made arbitration clauses attractive was their impact on class-action litigation," said Mr. Spahr, who will testify at a Thursday CFPB hearing in Albuquerque on the industry's behalf. "Most banks and companies using it now will conclude it's no longer worth it."

Companies' use of the bans became more common after a 2011 Supreme Court ruling said federal law requires state courts to uphold the bans, even if they're barred in state laws. Consumer advocates say the bans prevent consumers from joining together to sue a large company.

Arbitration panels conducted in private, they argue, can sometimes lead to the appointment of a arbitrator – who isn't required to be a judge – favorable to the company facing a consumer's claim.

But in a debate that mirrors a similar battle over tort law – the ability to sue if a harm is committed – opponents have hit back against the CFPB itself in an attempt to draw attention to its stance on arbitration.

One ad, aired during a Republican debate in November, begins with a series of shirt sleeve-clad bureaucrats stamping papers in a cavernous room, beneath a red banner of Sen. Elizabeth Warren (D) of Mass., that seems intended to evoke Communist Russia.

"Washington's latest regulatory agency, designed to interfere with your personal financial decisions" a deep-voiced narrator intones as the bureaucrats red-stamp "Denied" on loans submitted by frustrated Americans." 

The ad, part of a $500,000 campaign paid for by the American Action Network, a center-right think tank, attacks the CFPB and Senator Warren, who was a catalyst in the agency's creation following the 2008 financial crisis.

In November, as a draft of the CFPB's rule circulated, the American Action Network's president, Mike Shields, told The New York Times that the bureau's position on arbitration "is a perfect example of how government is taking away the power of individuals and handing it to the trial lawyers." 

Warren casts the clauses in different terms. By barring consumers from joining a class action suit, "the lender can break the law, but if the amounts at stake are small – say, under $50 per customer – few customers would ever bother to sue," she wrote in a 2007 article in Democracy Journal.

However, the bureau's study found that at least 160 million people who were able to join a class action suit were eligible for relief between 2008 and 2012 in cases where companies were found to have engaged in harmful behavior. Settlements in those cases totaled $2.7 billion in cash, in-kind relief, and attorneys' fees and expenses.

The bureau's proposal will also create a tracking system to allow regulators and consumer groups to spot bias in arbitrations or other practices that could harm consumers.

Following a 90-day comment period, the bureau will then draft a final version of the rule, which must be reviewed by the Office of Management and Budget before it can go into effect.

But a coalition of labor groups and consumer advocates argued the rule could go even further, saying it should prohibit mandatory arbitration in individual cases.

"We commend the CFPB for moving forward on a rule making to address the public harm caused by forced arbitration," they wrote in a letter to the bureau on Wednesday, "and we urge the Bureau to use its full statutory authority to restore consumers' right to choose how to resolve disputes with financial institutions under the law."