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CFPB Considers Proposal to Ban Some Arbitration Clauses

Logo for Consumer Financial Protection Bureau On Wednesday, the Consumer Financial Protection Bureau (CFPN) announced a proposal to ban arbitration clauses which many companies use to prevent consumers from joining class-action lawsuits. In its announcement, the CFPB explained the problem:

"Many contracts for consumer financial products and services include arbitration clauses. These clauses typically state that either the company or the consumer can require disputes about that product to be resolved by privately appointed individuals (arbitrators), rather than through the court system. Where such a clause exists, either side can generally block lawsuits from proceeding in court. These clauses also typically bar consumers from bringing group claims through the arbitration process. There are arbitration clauses in all kinds of consumer financial products, from bank accounts to private student loans. They affect tens of millions of consumers. As a result, no matter how many consumers are injured by the same conduct, consumers must resolve their claims individually against the company, which few consumers do."

The Dodd-Frank Wall Street Reform and Consumer Protection Act, passed by Congress, required the CFPB to study the use of arbitration clauses in consumer financial markets and provide remedies. The CFPB released the results of its study in March 2015:

"... arbitration clauses restrict consumers’ relief for disputes with financial service providers by allowing companies to block group lawsuits... very few consumers individually seek relief through arbitration or the federal courts, while millions of consumers are eligible for relief each year through group settlements. According to the study, more than 75 percent of consumers surveyed in the credit card market did not know whether they were subject to an arbitration clause in their contract. Fewer than 7 percent of those consumers covered by arbitration clauses realized that the clauses restricted their ability to sue in court."

The proposal would not ban arbitration clauses, but limit and monitor their use instead:

"... the clauses would have to say explicitly that they do not apply to cases filed as class actions unless and until the class certification is denied by the court or the class claims are dismissed in court. The proposals under consideration would also require that companies that choose to use arbitration clauses for individual disputes submit to the CFPB the arbitration claims filed and awards issued. This will allow the Bureau to monitor consumer finance arbitrations to ensure that the process is fair for consumers. The Bureau is also considering publishing the claims and awards on its website so the public can monitor them."

This is really good because the playing field is heavily tilted against consumers. A friend (who asked to remain anonymous) experienced a very lengthy arbitration process with a big bank that stretched out for more than 12 years. The process should have been resolved a lot faster, and the bank still refused to pay after the arbiter's decision. That's one way companies abuse consumers, knowing that most consumers have limited financial resources and legal options.

Readers of this blog are familiar with the problem. I discussed it during a 2014 review of the Vanilla Visa Prepaid Card, which includes arbitration in its terms. Bankrate published in 2004:

"Binding arbitration, a little noticed clause in many agreements and contracts, strips consumers of their fundamental rights, including the right to sue individually or join a class-action suit if they have a problem with a company. Under binding arbitration, a consumer can be forced to pay thousands of dollars upfront to pursue a complaint, travel thousands of miles to a location of the company's choosing for the hearing, argue their case before an arbitrator who depends on the company for future business and surrender such basic legal weapons as the right to discovery and the right to appeal a decision... Labeled by the National Consumer Law Center as "astonishingly unfair and undemocratic," these clauses affect millions of consumers across the country. Corporations insert them into employment and home building contracts, in agreements for credit cards, computer software and hardware purchases, and many types of loans."

And, arbitration can cost more than a traditional court trial:

"Consumers' costs for arbitration vary widely and depend on the arbitration company, the type of dispute and the cost of the proposed remedy. The American Arbitration Association offers a streamlined process for consumer disputes that limits costs, but limits your rights too. While the American Arbitration Association is an umbrella group for arbitration companies, not all arbitration companies follow its suggested rules. Under these consumer rules, there is a filing fee of $125 if your dispute is under $10,000 and $350 if it is over that amount... However, in exchange for the low filing fees and streamlined process, you must give up some of your rights... There is no contingency in arbitration. Also, these costs don't include costs for an attorney if you want one..."

According to the National Association of Consumer Advocates (NACA):

"One of the alleged benefits of arbitration is that it costs less than litigation, but frequently this is not true for consumers and employees. Forced arbitration frequently costs more than taking a case to court and can cost thousands of dollars. Individuals often have to pay a large fee simply to initiate the arbitration process. If they are able to get an in-person hearing, individuals sometimes have to travel thousands of miles on their own dime to attend the arbitration. In the end, the loser (usually the individual) often pays the company’s legal fees."

The benefits of the CFPB arbitration proposal:

  1. Consumers get their day in court. With current arbitration clauses, consumers don't.
  2. A deterrent against wrongdoing and bad actors. The CFPB proposal encourages companies to comply with the law to avoid lawsuits.
  3. Increased transparency. Arbitration processes and results shouldn't be secret. CFPB monitoring would help consumers determine whether or not they're getting a good deal in arbitration.

So, the CFPB proposal to ban arbitration clauses is very good and welcomed news for consumers. You probably already use a service that includes arbitration clauses. The Public Citizen website lists the banks, retail stores, entertainment, online shopping, telecommunications, consumer electronics, software, nursing homes, and health care companies that include binding arbitration clauses in their contracts with customers.

If this bothers you (and I hope that it does), you can take action at the NACA website. And, tell your elected officials you support the CFPB's arbitration proposal. What are your opinions of the CFPB arbitration proposal?


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Chanson de Roland

The proliferation of arbitration clauses in consumer contracts is another instance of the failure of our courts in either going too far to cater to the interests of a dominant special interests group, here big business, or not going far enough to protect the constitutional rights of individuals or classes of persons. The courts, both federal and state should have struck down consumer arbitration clauses long ago. The patent illegality of consumer arbitration clauses for nearly every instance of consumer services rests on two doctrines: They are contracts of adhesion, and they shock the conscious, if one has any conscious to shock.

The law prohibits contracts of adhesion because there is no fair bargaining, because there is no alternative to the contract in the market place, and the party is forced to accept the contract because the services or goods being offered are essential. Those conditions are certainly true for the vast majority of consumer financial services, when it comes to arbitration clauses. There is almost no bank, brokerage, credit card company, or other financial firm and none that I am aware of that offers its services without an arbitration clause, except in the rare instant were the law presently prohibits such clauses. So the consumer who seeks the range of financial services that are necessary for modern life has no choice but to accept an arbitration clause to get those services or do without those services and, thus, abandon modern life. Therefore, no bargaining is possible, because the consumer must have the services, and there is no alternative in the market where he can get those services without an arbitration clause. That is a classic instance of a contract of adhesion, which lawyers are taught that the law should not countenance as an enforceable arbitration provision because there was no fair bargaining but impermissible coercion based on necessity and the absence of any alternative.

The second problem with most arbitration clauses, even if we ignore that they are contracts of adhesion, is that they should shock the conscious of any court in that they require of the typical consumer procedures and/or expenses that he has neither the skill or resources to satisfy, while his adversary, the financial firm, easily has the skill and resources to satisfy those requirements, so that the process of resolving disputes through an arbitration clause is manifestly unfair. Arbitration clauses are further unfair in that they deprive the consumer of rights, powers, and remedies that would be available in a court and which are required or at least advisable for ensuring that the arbitration process will be a fair process that produces a just result. Then, there is the fact that the arbitrators are often biased in favor of the financial industry in that their profession, careers, and/or compensation depends or have been made in that industry. Taken together, these burdens of unfair procedural rules; unaffordable expenses; the lost of rights, remedies, and methods of discovery that are available in a court, and/or the often at least psychological bias and/or conflicts of interests of the arbitrators, the conscious of any court of justice would be shock, find that in most instances, where the forgoing facts are present, the process is grossly unfair and, thus, unjust, and therefore, the arbitration clause would be void ab intio as a matter of public policy and as contrary to the disposition of any court of justice to enforce such consumer arbitration clauses.

The foregoing is what textbook, black letter law requires. That our courts and particularly the U.S. Supreme Court have held to the contrary is a black day for American jurisprudence. It is also a tragic thing that Richard Cordray, a distinguish lawyer who is the Director of the Consumer Financial Protection Bureau (CFPB), can't simply state that consumer arbitration clauses are henceforth void, because they are contracts of adhesion and because they are so grossly unfair as to violate public policy, but must instead vitate those sound and venerable legal principles, because our corrupt political system of both Democrats and Republicans, but much, much more the Republicans, will do everything that it can to defeat the CFPB's instant effort to outlaw the unfairness of consumer arbitration clauses, including destroying the CFPB as an effective agency to protect consumers in financial transactions. So, instead of boldly giving full vitality to the the foregoing venerable legal principles, Director Cordray must water them down in the hope of getting even a little done to protect consumers.

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