The Consumer Financial Protection Bureau's (CFPB) office in Washington D.C.

The Consumer Financial Protection Bureau (CFPB) announced a new rule that will disallow companies from using mandatory arbitration clauses that often prevent groups from having their day in court. The move by the CFPB was announced through a press release on July 10.

Consumer financial products such as credit cards and bank accounts often have arbitration clauses that prevent consumers from coming together to sue their banks or financial companies for wrongdoing.

Because customers have been forced to stop trying to sue, or sue alone for a very tiny amount, large financial companies can avoid the courts and lawsuits.

The hope is that the CFPB’s new rule will prevent wrongdoing by giving the consumers the right to join together to pursue justice and relief through group lawsuits.

"Arbitration clauses in contracts for products like bank accounts and credit cards make it nearly impossible for people to take companies to court when things go wrong," said CFPB Director Richard Cordray. "These clauses allow companies to avoid accountability by blocking group lawsuits and forcing people to go it alone or give up. Our new rule will stop companies from sidestepping the courts and ensure that people who are harmed together can take action together."

The amount of contracts for consumer financial products and services that include a mandatory arbitration clause ranges in the hundreds of millions. The mandatory arbitration clause can block any type of lawsuit, but companies will almost always use the clause to block group lawsuits, or “class action” lawsuits.

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Class action lawsuits only require a few consumers to seek relief for everyone that has been negatively impacted by a financial company’s unethical practices. The mandatory arbitration clause, which has been disallowed by the CFPB, requires every individual consumer to file an individual claim against the company, despite the fact that tons of customers have been affected by the company.

Often, consumers will not spend the time or money required to pursue a formal, individual claim because the stakes are so small.

The move by the CFPB should be welcomed news to student loan borrowers throughout the U.S. Both small and large student loan servicers and lenders have been sued by the CFPB for conducting unethical practices when dealing with student debtors.

In January, the CFPB sued Navient, the country’s largest student loan servicing company, alleging that the company has “systematically and illegally” failed borrowers. The lawsuit claimed that Navient had given wrong payment information to borrowers, processed their payments incorrectly, not responded to customer complaints, and damaged the credit scores of military veterans after reporting that they had defaulted on their loans, even though veterans have the right to seek debt forgiveness.

In March of 2016, the CFPB’s lawsuit against the company Student Loan Processing.US eventually led to the company being shut down by a federal court judge, but not before they reconciled their finances by reimbursing cheated students. In this case, student debtors were being charged without receiving the company’s services, while also receiving hidden monthly charges attached to their student loans.

Image Copyright © Payton Chung