Overdraft protection is meant for your security, but if this security is being threatened by higher fees, you can now sue your bank.
How do you get overdraft protection?
Overdraft protection is provided by your bank that enables you to purchase merchandise/services or pay your bills even with insufficient balance in your account.
That means if you are running out of balance and you are getting your card swiped at a grocery store or in a mall, your bill amount will be paid if you have an overdraft protection facility from your bank.
many a times customers end up paying overdraft fees as high as 35% even if they are having an overdraft protection.
In such cases, the normal rule says that the bank should wave off such charges, but the reality is different.
Normally, when a customer applies for an account opening or for credit card issue or a loan, he has to sign an agreement.
This agreement binds him or her in a mandatory arbitration clause. This clause restricts the customer from entering into a class action lawsuit and settles any problem that occurs with the help of an independent arbitrator or an attorney that is hired on behalf of the company to resolve it.
In other words, when a customer enters into such agreement, he is waving off his right to sue the company in public if something goes wrong.
Financial institutions and big corporates consider such arbitration process as efficient for both the ends– consumers as well as for them.
The Consumer Financial Protection Bureau (CFPB) has a different take on this process and so it announced some new rules enabling consumers to file class action lawsuits which have been long refrained by financial institutions.
The new rules will now have an impact on every kind of financial institution involving banks, debt collectors, and credit card issuing companies, check cashers, credit reporting agencies and the consequences are quite evident as many financial institutions are not liking the proposed idea.
Furthermore, the Arbitration Association of America, an agency for handling arbitration cases levy a heavy charge of $200 as initial filing fee exclusive of fees paid by consumers to hire attorneys.
Such steps potentially damage customers who are seeking small claims financial relief (Because for a wealthy customer, this all seems a hassle free task as the company will waive off the charges upfront.)
This is quite evident from the CFPB statistics as between 2010 and 2011, only 25 cases were registered by small claim consumers (claims under $1000).
On an average, of all consumers who filed cases against these financial institutions, only 9% sought any financial relief at all and rest secured only 12% of the claim amount in financial relief.
On the contrary, of all the claims where financial institutions filed cases against consumers, 93% turned in institution’s favour.
Thus, without a class action lawsuit, the customers with low amount claims or with limited resources could not succeed, and as per a survey conducted by CFPB of all credit card consumers who faced problems, only 2% were ready to file a case against financial institutions to resolve low amount dispute.
So, the new rules will now rule out the possibility of the companies from including arbitration clauses that restrict customers from filing a class action lawsuit against these financial corporations.
This rule is extended to most of the financial products and services like credit cards, prepaid cards, auto loans, depositing and checking accounts, loans and others.
However ,the proposals are not excluding the arbitration clauses in its entirety, but CFPB has made it a rule for the companies that include arbitration clauses for individual disputes to submit the arbitration claims filed and awards issued to CFPB.
This will enable Bureau in monitoring consumer finance arbitrations to ensure a fair process for consumers.
CFPB is further considering publishing these awards and claims on its website to promote transparency in the company’s operations.
For the American Chamber of Commerce, the news came as a stroke for they believe that the new rule will benefit class action lawyers resulting in huge profits for them and will not protect the consumers’ interest in the real sense.
The Chamber of Commerce stated that for consumers, the faster, cheaper and more effective method is operating through the arbitration clause.
The CFPB rules, however, are in negotiations and will be applicable from all future consumer agreements.