Originally published by the Oxford Business Law Blog. Reprinted with permission.
Forced arbitration clauses are now almost impossible to avoid in consumer contracts for financial services and products ranging from credit cards to private student loans. Despite their ubiquity, most consumers aren’t even aware of them. This is because companies frequently bury them deep in the lengthy fine print of their contracts, which they then offer to consumers on a ‘take it or leave it’ basis.
Forced arbitration clauses warrant close scrutiny from policymakers and the public because their abuse poses a significant threat to the financial well-being of millions of Americans. What they say is that if you have a dispute with your financial services company and can’t persuade the company to address the harm it has caused, you are prohibited from suing the corporation in court. Instead, your only option is to try pursuing your claim in an inferior forum known as ‘arbitration’.
Consumers face high barriers to even initiate an arbitration claim, and, once started, they will find that every step of the process is heavily stacked against them and in favor of the financial services company. The basic principles of fairness and due process protections we have come to expect in traditional courts of law are often conspicuously absent in arbitration.
Following the 2008 economic meltdown, the US Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act to crack down on the kinds of fraudulent and predatory banking and lending practices that contributed to the crisis. Congress included in the law a provision directing the newly created US Consumer Financial Protection Bureau (CFPB) to examine the use of forced arbitration clauses in consumer financial contracts and to regulate them if it finds that these clauses are harmful to the public. In response, the CFPB issued a comprehensive study on forced arbitration in March 2015. The study confirmed that the use of forced arbitration clauses was widespread and was preventing consumers who had been harmed by banks and other financial institutions from holding them accountable.
Based on this study, in May 2016 the CFPB proposed a rule that would place important restrictions on the use of forced arbitration clauses. Specifically, the proposal would prohibit financial services companies from including ‘class action waivers’ in forced arbitration clauses, which block consumers from banding together to bring class action lawsuits. The agency found this step important because the typical dispute between a consumer and financial institution involves a relatively small amount of money and arises from a harmful practice that affects hundreds or thousands of other consumers. For most consumers, the small amount of money at issue makes individual lawsuits in this area not worth the expense. Class action litigation, however, is uniquely well-suited for resolving these kinds of disputes.
The proposal would still allow forced arbitration for individual claims, though the CFPB would require covered corporations to report certain data about individual forced arbitration disputes in which they are involved in the future.
Shortly before the CFPB issued its proposal, my co-authors and I published a report that closely examined the problem of forced arbitration clauses in contracts for financial services and products and the CFPB’s preliminary steps toward a regulatory response. The report, Regulating Forced Arbitration in Consumer Financial Services: Re-Opening the Courthouse Doors to Victimized Consumers, sought to provide an independent assessment of what regulatory restrictions the CFPB could and should undertake based on the agency’s legal authority and the findings of its preliminary study.
On the basis of our evaluation of relevant legal and policy considerations, the report made three broad points:
- the CFPB is not required by law to base the stringency of its final rule on a strict application of cost-benefit analysis, nor would this approach achieve the best policy outcome;
- the CFPB’s study overlooked one important benefit of its rule – namely, that providing consumers with meaningful access to the courts to bring their claims would have the salutary effect of complementing and reinforcing the agency’s various regulatory programs aimed at preventing banking and lender abuses. In particular, our report provides a detailed discussion of how the civil justice system has long been recognized to enhance the effectiveness of traditional regulatory programs, such as those implemented by the CFPB; and
- the industry’s claims that strong restrictions on forced arbitration will harm consumers or contribute to unemployment are meritless.
Our report concludes that the CFPB should issue a tough final rule that: (1) bans ‘class action waivers’ in forced arbitration clauses; and (2) short of banning forced arbitration for individual claims, address the worst anti-consumer features that can affect such claims, including excessive filing fees, mandating inconvenient locations for arbitration hearings, unduly short statutes of limitations, and improper limitations on available relief.