Arbitration clauses 'bad for consumers' Critics beg to differ


July 11, 2017

Consumer Financial Protection Bureau Director Richard Cordray has spoken out on the bureau’s final rule banning mandatory predispute arbitration clauses that prevent class actions. The rule, adopted as final by the CFPB on July 10, 2017, allows arbitration clauses only if applied to individual claims (see Banking and Finance Law Daily, July 10, 2017). Cordray, in prepared remarks, said that the bureau’s research, mandated by the Dodd-Frank Act, showed that "these little-known clauses are bad for consumers." The rule met with both approval and criticism by legislators, trade groups, and consumer organizations.

Consumers "may not be aware that they have been deceived or discriminated against or even when their contractual rights have been violated," Cordray said. He noted that many consumers do not have the time or money to fight on their own and hiring a lawyer for an individual case may not be practicable. Forcing consumers to go it alone means companies are less likely to face legal action. As a result, consumers are hurt in two ways:

  1. Compared to group lawsuits, individual arbitration means consumers are less likely to get relief for the harms they have suffered.
  2. Consumers are likely to continue facing ongoing harm that does not get corrected.

Opposition duly noted. After outlining the provisions of the "common-sense" final, Cordray stated that he is "aware of those parties who have indicated they will seek to have the Congress nullify this new rule." The CFPB director said that this is a "process that I expect will be considered and determined on the merits." His obligation as director of the CFPB "is to act for the protection of consumers and in the public interest. In deciding to issue this rule, that is what I believe I have done."

Hensarling voices strong opposition. House Financial Services Committee Chair Jeb Hensarling (R-Texas) commented on the final rule, stating, "This bureaucratic rule will harm American consumers but thrill class action trial attorneys." Hensarling soundly criticized the "anti-consumer rule" and noted, "In the last election, the American people voted to drain the D.C. swamp of capricious, unaccountable bureaucrats who wish to control their lives." The committee chair called on Congress to work with President Trump to reform the CFPB.

Dem lawmakers react favorably. In direct opposition to Hensarling’s disapproval of the CFPB rule, a number of Democrats praised the bureau and the rule. Senator Sherrod Brown (D-Ohio) referred to mandatory arbitration as "a practice used by Wall Street banks and predatory payday lenders to deny consumers access to the justice system when the institution engages in illegal behavior." Brown said that consumers are forced "into secret arbitration proceedings run by private industry."

"This CFPB rule will allow working families to hold big banks accountable when they're cheated and help discourage the kinds of surprise fees that consumers hate," stated Sen. Elizabeth Warren (D-Mass). Warren cautioned, "In the upcoming months, the U.S. Chamber of Commerce and other big business lobbying groups will go all out to get Republicans in Congress to reverse this rule." She noted that Republicans need to make a decision "whether to defend the interests of their constituents or shield a handful of wealthy donors from accountability." The U.S. Chamber of Commerce, however, responded by calling the rule "a prime example of an agency gone rogue."

Senator Catherine Cortez Masto (D-Nev) also supported the rule, stating, "For far too long, mandatory arbitration clauses have allowed financial services companies to engage in duplicitous and harmful practices, all while avoiding legal action from their victims." Masto commended the CFPB for "correcting this flawed practice and for their continued efforts to keep unscrupulous financial services companies accountable."

On the House side, Rep. Brad Sherman (D-Calif) said, "The CFPB’s arbitration rule is great news for consumers looking to open a bank account in the future." Sherman also referred to Wells Fargo Bank, urging Congress to pass legislation that would ensure Wells Fargo customers would have their day in court.

Massachusetts AG support. Like Massachusetts Sen. Warren, the state’s Attorney General, Maura Healey, supports the arbitration rule. "Class action claims are critical to ensuring that consumers are able to pursue their legal rights and deterring businesses from using unlawful, unfair or deceptive business practices," Healey said. "We fought for this rule because it provides a valuable check against corporate misconduct and are pleased that the CFPB has adopted it to protect the public interest."

Trade/consumer groups. Consumer advocate groups came out in support of the CFPB’s rule, while banking trade groups, such as the American Bankers Association and Consumer Bankers Association, strongly criticized the rule. According to the ABA, the rule is a win for class action lawyers and a loss for consumers. "Consumers fare better in arbitration," the ABA stated. The association quoted statistics from the CFPB’s arbitration study in support of their position. The CBA also referenced the CFPB study, stating that the CFPB incorrectly interpreted the results. "By only using fuzzy math is the CFPB able to interpret these figures as favorable to consumers."

Consumer organizations such as Americans for Financial Reform, however, disputed the notion that arbitration benefits consumers. "Consumers are often blindsided to discover that ‘ripoff clauses’ buried in the fine print of financial contracts block them from challenging illegal behavior in court," the AFR wrote. The Center for Responsible Lending added, "This rule is a pragmatic step forward to ensure there is transparency, fairness, and accountability in consumer finance."

Companies: American Bankers Association; Americans for Financial Reform; Center for Responsible Lending; Consumer Bankers Association; U.S. Chamber of Commerce

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