Bank of America announced on Friday (Aug. 14) its intention to curtail arbitration in a wide array of consumer accounts. The change covers the company’s credit cards, consumer recreational vehicles and marine loans and banking customers.
The announcement came after the Obama administration’s proposal to ban arbitration clauses from credit card agreements as part of a wider push for consumer protection. The administration has already passed sweeping regulations that prohibit widely criticized credit card practices such as arbitrary interest rate hikes and unfair penalty fees, according to Zacks Investment Research.
Although banks more commonly use arbitration to go after unpaid debts, it also provides an important shield against costly class-action cases. Opening the door for class-action and other lawsuits would push up the costs of banks’ legal costs, which in turn would be passed on to consumers.
Unknown to many consumers, card agreements typically include an arbitration clause that waives a card holder’s right to sue. This gives banks the ability to use the clause defensively to protect themselves from lawsuits or offensively to go after debt collections.
Consumer advocates faulted the arbitration process saying that if the arbitrator or the arbitration forum depends on the corporation for repeat business, there may be an inherent incentive to rule against the consumer.
Other banks scrambling to comply with the new law includes American Express, JP Morgan Chase & Co., Capital One Financial Corp. and Discover Financial Services.