Reining in Forced Arbitration in Consumer Financial Services
Re-Opening Courthouse Doors to Consumers
What’s in your wallet? If you have a credit card there, chances are that you are bound by what’s called a “forced arbitration” clause buried in the fine print of your credit card agreement. It says that if you have a dispute with the credit card issuer and can’t persuade the company to address the harm it has caused, you can’t sue them. Instead, you can only pursue your claim by going through an arbitration process that the company has already stacked against you.
It’s no surprise that the financial industry — the same folks who came up with the idea of charging you $3 to electronically withdraw your own money — would find a way to insulate themselves from accountability. Forced arbitration is now perfectly common in a host of financial products, including auto and student loans. They’re particularly ubiquitous in products aimed at low-income consumers. So, for example, 92 percent of prepaid credit card agreements include forced arbitration language.
Some help is on the way, however, courtesy of the Consumer Financial Protection Bureau (CFPB) and the much maligned Dodd-Frank financial reform law. Dodd-Frank directed CFPB to study the impact of forced arbitration clauses and to regulate them to protect consumers. CFPB studied the matter and concluded regulation was in order.
A May 2016 paper from Center for Progressive Reform amply demonstrates why CFBP is right to act. As the co-authors write,
In contrast to the civil justice system, the forced arbitration process disadvantages consumers because it tends to be secretive, less independent of industry, more prone to erroneous and arbitrary rulings, more likely to discourage the pursuit of claims with procedural barriers, and more likely to provide inadequate relief for compensating victims of corporate wrongdoing…. Consumers typically are unaware of when and how forced arbitration clauses limit their rights. But those who try to enforce their legal rights through arbitration quickly learn that the process they are forced into is designed to protect the interests of businesses rather than deliver justice.
In the initial outline of its regulatory proposal, the CFPB announced its intention to ban forced arbitration clauses that prohibit consumers from joining class-action lawsuits. It also outlined a plan for collecting and publicizing data about arbitration claims brought by individuals. This is an important first step, but the CFPB’s study on forced arbitration makes plain that additional action is needed to protect consumers’ rights to pursue individual claims. Short of banning these types of forced arbitration clauses, the CFPB should at least restrict their worst anti-consumer features.
On this score, the CPR paper’s authors, Martha McCluskey, Thomas McGarity, Sidney Shapiro, James Goodwin and Mollie Rosenzweig, recommend:
Making the arbitration process far less secretive. Hearings and their results should be publicly announced and recorded.
Eliminating excessive arbitration fees. Big banks and other financial services corporations often require people to pay hundreds or even thousands of dollars just to dispute unjustified charges or address other wrongdoing.
Ensuring arbitration hearings aren't held in far-flung locations. Corporations can send representatives to hearings anywhere in the country. Individual Americans are far less likely to be able to travel across the country, particularly those with limited resources.
Preventing corporations from choosing arbitrators who favor industry positions. If companies want consumers to use arbitration to settle disputes, arbitrators must be neutral and unbiased.
Banning language that prevents individuals from seeking justice in our courts when arbitration fails. With the arbitration process tilted so far in favor of big banks and credit card companies, Americans need another avenue to hold corporations accountable.