The Consumer Financial Protection Bureau announced a proposal Wednesday to significantly curb the use of forced arbitration by banks and credit lenders. The move would affect banks, credit unions, credit card issuers, lenders (auto, payday, and auto title), installment and open-end lenders, private student lenders, debt settlement firms and buyers, and other consumer financial entities as defined in the Dodd-Frank Act section 1002.
Forced arbitration is an increasingly common form of dispute resolution, included in contracts consumers agree to as a mandatory condition to use many products and services, such as bank loans and credit cards. By signing up to forced arbitration (typically without full knowledge of what it means), consumers waive their right to sue, participate in a class action lawsuit, or appeal the arbitrator’s decision should the company with whom they’ve made the agreement cheat or harm them, or otherwise break the law. More often than not the arbitrator in these disputes is picked exclusively by the company, and isn’t even required to have a legal background. Even more disturbingly, some companies, like Spotify, include additional clauses enforcing gag orders against their customers for even saying they have a legal dispute with said companies.
Businesses and their lobbying groups claim that arbitration is more efficient and just as fair to claimants as going to court. If so, one must ask why do most companies refuse to sign contracts with other businesses that include forced arbitration clauses similar to the ones they require their customers to agree to?
New rules proposed by the Consumer Financial Protection Bureau (CFPB) would stop banks and other lenders from using forced arbitration agreements to prohibit their consumers from banding together and filing class-action lawsuits. The move is viewed properly in the light of a detailed study published in March by the watchdog agency, which compared the outcomes of forced arbitration and class-action lawsuits.
According to the New York Times, the CFPB study found that in a five-year period, class-action settlements won 3 Billion for about 160 million Americans. Contrary to U.S. Chamber of Commerce claims that class-action lawsuits only serve to pad plaintiff lawyers’ pockets, 18 percent of this total amount was used to pay lawyers. Meanwhile, the study found businesses were heavily favored over consumers in arbitration, with larger judgments being awarded against consumers than consumers obtained in relief.
In 2010 and 2011, arbitration settlements awarded businesses $2.8 million, mostly for debt payments. Of the few individuals who actually made it to arbitration during this same period, only 78 judgments were in favor of consumers – for a grand total of less than $400,000.
Based upon this and similar findings, the CFPB concluded that forced arbitration simply isn’t fair to consumers and moved forward with the proposal revealed October 7. While the plan restores the right of consumers to band together to file class-action lawsuits, it doesn’t do nearly as much for individuals seeking justice, who aren’t part of a class. Companies will maintain the ability to force consumers into arbitration on an individual basis. Even so, the CFPB proposal does consider measures that should increase transparency in the arbitration process.
“Consumers should not be asked to sign away their legal rights when they open a bank account or credit card,” says CFPB Director Richard Cordray. “Companies are using the arbitration clause as a free pass to sidestep the courts and avoid accountability for wrongdoing. The proposals under consideration would ban arbitration clauses that block group lawsuits so that consumers can take companies to court to seek the relief they deserve.”
Cory Watson Attorneys believes the Consumer Financial Protection Bureau’s proposal is a major step in the right direction and an important victory for consumers.
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