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Class Action Lawsuits Could Be Coming to a Credit Union Near You

Class Action Lawsuits Could Be Coming to a Credit Union Near You
Posted: Aug 31, 2016
Categories: Regulations
Comments: 0
Author: Bill Lehman

Proposed CFPB changes could cost FI’s $100 million a year in new legal fees

The Consumer Financial Protection Bureau’s (CFPB) mission is “to make consumer financial markets work for consumers, responsible providers, and the economy as a whole.”  But it now appears the CFPB is expanding its mission to include more lucrative class action lawsuits.

Most consumer banking agreements, including credit card and loan agreements, currently have a mandatory arbitration clause which specifically “bans consumers from seeking redress for potential issues in a court of law.” In other words, consumers sign away their rights to file a lawsuit against a bank or credit union. The rationale behind this is that arbitration is a highly useful tool in stopping frivolous and very expensive lawsuits which, by the CFPB’s own admission, typically result in no payments to consumers but results in huge payouts by the banks, with the money presumably going to the legal firms representing the class.

To place the “right to bring suit” back in the hands of consumers, the CFPB proposes to prohibit language in agreements that bar consumers from filing or participating in a class action. Note that it does not ban arbitration. If accepted, the same proposal provides some specific estimates on the resulting consequences of this new ruling. The CFPB’s research shows that there will be at least 6,042 more class actions filed against the 53,000 business covered by this rule in the first five years, expected cost to financial institutions more than $100 million a year in legal fees.

What does this mean to credit unions?

Budget for Legal Fees: If the CFPB proposed ruling is approved, credit unions will face attorney-driven class action suits, increasing legal fees to defend themselves. Budgeting for the inevitable frivolous lawsuits will be a necessary exercise each year.

Insurance Expense: The CFPB estimates that new class action lawsuits will result in $342 million a year in judgments against financial institutions. The Bureau also notes that providers may attempt to manage the risks of increased class litigation exposure by opting for more comprehensive insurance coverage. Credit unions should inquire with commercial insurance agents regarding the coverage provided by existing general liability insurance, and consider riders that cover very large judgements against them.

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