This week I caught up with an old friend – a German native who was visiting Washington, D.C. from Berlin; he inquired into the latest updates with U.S. Financial Regulatory Reform. After I described the year of “defense” that consumer protection advocates have played trying to fight back against continual attempts in the U.S. House of Representatives to weaken and repeal critical parts of the Dodd Frank Wall Street Reform and Consumer Protection Act, (aka, Dodd-Frank Act) he asked: “Is there not an ombudsman or government entity whose charge it is to watch out for consumers?”
I smiled. The answer to this question was, thankfully, a resounding ‘yes;’ that, after the country was nearly crippled by irresponsible financial institutions that were poorly regulated, there is now a true consumer watchdog in the agency charged with looking out for the best financial interest of the consumer, the Consumer Financial Protection Bureau. In 2010, Congress passed the Dodd-Frank Act which ushered in a significant change in the regulation of the American Financial Regulatory system, part of this change was the creation of the new agency who sole responsibility is to look out for the best financial interests of the consumer. In the CFPB, Americans finally have a “People’s Bureau” and not the “Tort Bureau” as the Wall Street Journal so recently tried to malign the CFPB in its article endorsing of the corporate favoring and consumer harming practice of binding mandatory arbitration or ‘forced arbitration’.
As I have previously written, binding mandatory arbitration is fast becoming a way for corporations to exculpate themselves from bad behavior. As a direct result of the increased and widely prevailing use of arbitration clauses, today’s consumer has no bargaining power when entering into any agreement to obtain credit or any financial service or product; this also applies even when applying for a job. A recent report released by Public Citizen and the National Association of Consumer Advocates demonstrates that, in this new environment, where an arbitration clause with class action waivers are present, consumers have little to no hope of expecting that any relief can be obtained through the courts where there is a dispute. Critical measures such as injunctions to curb harmful practices may soon be harder to achieve through the courts.
Over the last couple of weeks, binding mandatory arbitration has been in the news. There has been some positive press coverage of this often, elusive and plain language unfriendly, issue of forced arbitration as a result of the CFPB’s recent announcement, that it would begin the study of binding mandatory arbitration as it is required to do, under Section 1028 of the Dodd Frank Act. This has been welcome news to the consumer advocates who work on these issues and the consumer attorneys who represent consumers who could not seek or obtain justice because of the existence of an arbitration clause in their agreements. Yet, all of the coverage has not been positive. There have also been some less than favorable, views on the fact that the CFPB is doing what it is charged to do – study whether forced arbitration is really in the best interests of consumers.
As if taking a cue from those whose own interests would be served if nothing changes and arbitration clauses remain in consumer finance agreements, the WSJ article critiques the CFPB for not also examining class actions and whether they are a better alternative for consumers than arbitration because the CFPB is biased in favor of the plaintiffs bar. It calls the CFPB which represents a victory for the American consumer, the “Tort Bureau.” Shame. Besides the fact class actions are their own best defense (class actions in this country provide a way to bring collective relief to Americans and to shed light on widespread corporate malfeasance), the fact CFPB is examining the use of arbitration - which impacts so many consumers, and which Congress saw fit to remove from mortgage contracts - is clearly reflective that the CFPB is following its statutorily mandated charge.
As the Wall Street Journal’s article correctly points out, arbitration is everywhere: “[b]anks, credit-card companies, payday lenders and other businesses have inserted mandatory arbitration clauses into private contracts for decades.” But, the question is still yet to be called on whether the prevalence of arbitration reflects that it is better for consumers or just a convenient get out of out jail free card for corporations. NACA will be weighing in more formally on this issue in its response to the CFPB’s request for information at a future date. What is clear by all accounts is that forced arbitration needs further inquiry and study. Why is it that so few consumers actually bring an issue to arbitration? Why should corporations be allowed to ban class proceedings in arbitration? If it is their clause and the process should be cheaper and more efficient, why not allow consumers who have suffered the same grievance to address their claims collectively? If arbitration is so helpful to consumers, why bury it in the fine print? If arbitration is so fair, why is the process so secretive?
The truth is that these clauses and the actual arbitration forums aren’t as benign as is purported by its proponents, the WSJ article and the thousands of corporations that have spent time and money to update their agreements in response to the Concepcion decision is, in our view, proof. But, the CFPB or anyone else shouldn’t just take our word for it. We are clearly biased in favor of consumers. The CFPB should clearly follow its charge to investigate the practice of forced arbitration which is secretive, where companies get to cherry pick the rules ( who to hire as an arbitrator and where to hold the arbitration), and the process is not subject to any judicial rules of evidence, judicial review or oversight; and, following the study, they should ban the practice. The CFPB is, of course, ‘the People’s Bureau.’
Written by Delicia Reynolds, Legislative Director for the National Association of Consumer Advocates (NACA)