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New Rule Clears The Way For More Class-Action Lawsuits Against Banks

MARY LOUISE KELLY, HOST:

Some other news now. Federal regulators have announced a new rule that could clear the way for more class action lawsuits against banks and other financial firms. At issue are so-called arbitration clauses that companies use to block customers from joining class actions. NPR's Chris Arnold explains.

CHRIS ARNOLD, BYLINE: Regulators say that millions of Americans who've been hurt by financial firms too often can't band together to fight back. That's because when you get a credit card or you take out a loan and you sign the paperwork, in the fine print, There's a clause that says that you're agreeing not to join a class action lawsuit. Richard Cordray is the director of the Consumer Financial Protection Bureau.

RICHARD CORDRAY: Mandatory arbitration clauses that block group lawsuits are bad for consumers. They allow companies to avoid accountability. And by sidestepping the courts, companies can avoid paying out big refunds and continue their harmful practices.

ARNOLD: Cordray says Congress directed the CFPB to consider such regulation. The bureau found that these clauses now exist in hundreds of millions of consumer finance contracts. It considered more than a hundred thousand responses to requests for public comment. And now it's issuing this new rule.

CORDRAY: So our rule bans financial companies from using mandatory arbitration clauses to deny groups of consumers their day in court. People who are harmed together can take action together.

ARNOLD: Meaning they can join a class action lawsuit. But the rule doesn't go into effect until next year. And financial industry groups still hope to block it. Matt Webb works on policy issues for the U.S. Chamber of Commerce.

MATT WEBB: I think that there is a very real chance that we're going to be able to get this rule pulled back in some fashion.

ARNOLD: Webb contends that basically most people only get a few bucks out of being a part of a class action lawsuit. and so he says the rule will be a big waste of time and money - except for the lawyers.

WEBB: I mean, this is an example of an agency largely going rogue, doing the bidding of the plaintiffs trial bar and doing something that's going to be harmful to consumers as well as the business community.

ARNOLD: Richard Cordray says a CFPB the study tells a different story. Over a five-year period, class actions returned hundreds of millions of dollars a year to consumers. The settlements also, he says, often require companies to change their practices.

CORDRAY: There is far more relief achieved for consumers, money in their pockets, if they can get to court to vindicate their rights than if they're stuck in individual arbitrations.

ARNOLD: Cordray also says that Congress has already passed a similar rule for military service members and also for people getting home mortgages. Still, Republicans in Congress for years now have been locking horns with Cordray in public hearings. And they've been trying to advance legislation to restructure and weaken his Consumer Protection Bureau. So this latest rule may turn out to be another flashpoint. And all sides expect to see intense lobbying. Chris Arnold, NPR News.

(SOUNDBITE OF FLOEX'S "SANDALEK") Transcript provided by NPR, Copyright NPR.