U.S. consumer watchdog wants partial ban on arbitration clauses

By Sarah N. Lynch

WASHINGTON (Reuters) - Banks and credit card companies would not be allowed to force customers to sign away their legal rights to take part in class action lawsuits, under a proposed U.S. regulation that is likely to draw ire from Wall Street.

The Consumer Financial Protection Bureau said on Wednesday the proposal marked the first step in the process of potentially drafting regulations to ban certain "free pass" arbitration clauses, often buried in fine print, that consumers must sign off on when opening financial accounts.

Banks, credit card companies and broker dealers typically use such clauses as a way to shield themselves from lawsuits and lower their legal costs. Signers cannot file claims in federal courts, and have to resolve disputes individually through privately appointed arbitrators.

"The essence of the proposals we have under consideration is that they would get rid of this free pass that prevents consumers from holding their financial providers directly accountable for the harm they cause when they violate the law," CFPB Director Richard Cordray said in prepared remarks for a hearing the bureau held on the topic in Denver, Colorado.

Wall Street banks have historically opposed any efforts to chip away at arbitration clauses, long targeted by consumer advocacy groups, which say they curb legal rights.

The 2010 Dodd-Frank Wall Street reform law gave both the CFPB and the Securities and Exchange Commission the power to restrict or ban arbitration clauses, and it also required the CFPB to study pre-dispute arbitration clauses.

Some Democrats in Congress have urged the SEC to write a rule, but the agency has not taken up the issue so far.

The CFPB, by contrast, is inching toward action.

In March, the bureau released a study which found that few consumers actually seek individual relief through arbitrations even though millions are eligible for group settlements. The vast majority of consumers do not even know if they are subject to an arbitration clause, the study showed.

The CFPB on Wednesday published an outline of proposals it will consider.

Not all arbitration clauses would be banned. Individual disputes, for instance, could still be resolved through arbitration.

But it would prohibit companies from using such clauses to block class action lawsuits. Companies that choose to use arbitration clauses for individual cases would have to submit information to the CFPB concerning any claims filed and awards issued.

The plan would apply to credit cards, checking and deposit accounts, prepaid cards, money transfer services, certain auto loans, auto title loans, payday loans, private student loans and installment loans.

Wednesday's plan immediately sparked strong reactions from both sides of the aisle on Capitol Hill, with Democrats applauding it and Republicans raising concerns.

Senate Banking Committee Ranking Member Sherrod Brown called the move "an important step toward leveling the playing field," while Texas Republican Randy Neugebauer, who chairs a House Financial Services subcommittee, said it was "politically driven by the trial bar."

(Reporting by Sarah N. Lynch; Editing by Richard Chang and Christian Plumb)