The consumer protection bureau created out of the rubble of the Wall Street meltdown took a big step Thursday to live up to its name and duty.
It proposed rules to restore the rights of customers to band together and file class-action lawsuits against financial firms for deceitful practices in bank accounts, credit cards and loans.
It’s a necessary step to level the playing field, at least somewhat, for lowly customers against these financial behemoths.
Until now, U.S. bank customers had signed away their right to sue their bank in court, often without being aware of it.
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Buried in the fine print of credit card agreements, bank accounts and insurance policies are what are known as binding, or mandatory, arbitration clauses.
It means customers are generally required to take any disputes with a bank to a third-party mediator instead of going to court. The nation’s top consumer financial regulator is ending the practice.
The Consumer Financial Protection Bureau proposed a rule that would ban arbitration clauses, which would affect the entire financial industry and the hundreds of millions of bank accounts, credit cards and other financial services Americans use.
Consumer advocates say these mediators are often biased and routinely rule in favor of corporations. Needless to say, the cards are stacked against customers who feel cheated.
Thankfully, these are the most sweeping regulations the Consumer Financial Protection Bureau has issued in its six years, and it’s about time. There was a need for it. A study, ordered by Congress and released last year, found that 15 of the 20 biggest credit card companies and half of all large banks had such mandatory arbitration clauses, as did nearly all prepaid debit cards and payday loans.
The study also found that three-fourths of Americans were unaware they had agreed to arbitration. The analysis suggested that arbitration is a more efficient way to handle small claims by individual customers; the new rules don’t cover those cases. But the bureau says that the possibility of class-action suits will deter unfair practices by financial institutions that affect many customers.
The public has 90 days to comment on the rule. If adopted, it would take effect next year.
The financial industry, of course, warns that these rules will raise costs for all customers. Such alarms would be more believable if banks were not already jacking up all sorts of fees and charges, and racking up sky-high profits.
The banks also say that the biggest winners will be trial lawyers, who will file frivolous suits in search of a big payday.
That’s a legitimate concern, but then again, if it takes a class-action lawsuit to stop a practice that hurts thousands and thousands of customers, that’s the price to pay.
This editorial originally was published by the Sacramento Bee.