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The fine print may be small, but it’s about to be the subject of a very large fight that will impact virtually every American consumer.

The Consumer Financial Protection Bureau said Wednesday it will propose a ban on arbitration clauses that prevent consumers from participating in class-action lawsuits, a move likely to generate the consumer watchdog’s biggest fight to date.

Corporations with an eye towards streamlining disputes with customers have for years included mandatory arbitration language in their standard consumer contracts. The clauses force consumers to settle disputes in arbitration, limiting their ability to file individual lawsuits or participate in class-action cases with others. Corporations say arbitration is quicker and fair for all involved.

Consumer lawyers have for years fought a losing battle against the clauses, arguing that they prevent customers from having their day in court.

Now the CFPB has taken their side. The agency said Wednesday it will take the next step in its three-year review of arbitration clauses, announcing plans to propose a ban on contract language that limits class-action participation, saying such clauses give corporations a “free pass.”

“With this free pass, companies can sidestep the legal system, avoid big refunds and continue to pursue profitable practices that may violate the law and harm countless consumers,” the bureau said in a press release. “The CFPB’s proposals under consideration would give consumers their day in court and deter companies from wrongdoing.”

The Line in the Sand

The proposal would cover all industries the CFPB regulates, including credit cards, checking and deposit accounts, prepaid cards, money transfer services, certain auto loans, auto title loans, small dollar or payday loans, private student loans and installment loans.

“Consumers should not be asked to sign away their legal rights when they open a bank account or credit card,” said CFPB Director Richard Cordray. “Companies are using the arbitration clause as a free pass to sidestep the courts and avoid accountability for wrongdoing. The proposals under consideration would ban arbitration clauses that block group lawsuits so that consumers can take companies to court to seek the relief they deserve.”

An Uphill Battle?

Expect industry response to be swift and harsh. In March, the CFPB released a three-year study of arbitration clauses, concluding they were bad for consumers. The research was roundly criticized by the banking industry.

A letter signed by the American Bankers Association, the U.S. Chamber of Commerce and other industry groups said the study had “significant defects.”

“Defects that otherwise will fatally taint any proposed rule that the Bureau might propose based on the study,” the letter said.

The group said the CFPB study was based on a too-limited set of arbitration cases, and did a poor job of assessing the costs of eliminating arbitration.

“The premises underlying the Bureau’s analysis of the cost savings associated with arbitration have been rejected by those who study law and economics, and the Bureau’s methodology and conclusions should, therefore, be subjected to meaningful expert review,” the letter said.

On the other hand, consumer groups are cheering on the CFPB.

“Forced arbitration clauses have already been banned in mortgage loans and loans to the military. They should be banned in all consumer financial contracts because they prevent consumers from holding lenders, even payday lenders, accountable when they are cheated,” said Ed Mierzwinski, consumer program director at the Public Interest Research Group. “The private, secretive arbitration system effectively serves repeat customers, like banks and hospitals, well but hurts average consumers.”

The CFPB found in its study that most consumers are unaware of arbitration requirements in contracts they sign. Only 7% of credit card consumers covered by clauses realized that their ability to sue in court was restricted, the CFPB said.

A More Transparent Process

Its new proposal will also change the rules governing individual arbitrations. The bureau considered, but rejected, an outright ban on these clauses. Instead, it will force firms that use arbitration to submit data on claims filed and awards issued. The data might be made public, the bureau said.

“The central idea of the proposals we are considering is to restore to consumers the rights that most do not even know had been taken away from them,” Cordray said. “Companies should not be able to place themselves above the law and evade public accountability by inserting the magic word ‘arbitration’ in a document and dictating the favorable consequences … Everyone benefits from a market where companies are held accountable for their actions.”

The CFPB proposal is now subject to a review by a “Small Business Review Panel,” which will gather feedback from industry stakeholders during the next 60 days. After that, the CFPB will formally propose its rule and open a public comment period.

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