A consumer can hardly hope to purchase a financial product or service without being subject to fine-print terms that require them to surrender their right to go to court and privately arbitrate any dispute that might come up between them and lenders or other financial institutions. But the CFPB’s proposal released today could change this dramatically as it takes its first step to restore the rights of millions of customers of big banks and lenders.
The agency proposes to regulate forced arbitration clauses in financial contracts by eliminating class action bans in financial services contracts. Forced arbitration clauses describe the terms in consumer lending and other financial contracts that forbid us from suing companies in court and require disputes to be resolved in private arbitration. More often than not these terms also prohibit class actions.
The CFPB proposal will be considered by a small business advisory review panel. The panel is required by law to permit small financial services providers to share their views on how rulemaking would impact them.
Here are five CFPB observations in the proposal that signal a turn for the better:
1) Consumers Don’t Have an Adequate Venue to Address Small Financial Injuries
The CFPB said that “the relative dearth of individual court or arbitration filings (based on data from its comprehensive study) may be explained by the fact that, where consumers know they are harmed, their individual injury may be too small to make it worth their time and effort to pursue a remedy for the harm, especially through a formal filing in court or in arbitration. These small injuries may also make it more difficult for consumers to find an attorney to handle their cases.”
Small-dollar financial harms are common in financial services, such as abusive interest rates and tacked-on charges and illegal fees. The agency recognizes that small-dollar harms are simply not being addressed. The companies imposing these harms are profiting from the fact that consumers’ hands are tied, unless those similarly wronged can band together in class actions to pursue claims.
2) Government Cannot Remedy Consumer Financial Harms Alone
So true. Here is the CFPB’s observation: “While the Bureau and other government enforcement agencies can remedy some of these harms through public enforcement actions and supervisory oversight, these agencies have limited resources. Therefore, the Bureau believes that consumers are better protected and the market is fairer for those companies that comply with the law when consumers also are able to obtain relief by grouping their own disputes against providers of consumer financial products or services in private proceedings, including litigation.”
In 2014, the agency received a letter from state attorneys general confirming that view.
3) Government Limits on Forced Arbitration Have Been Done Before.
The CFPB will be going in the right direction, following counterparts in the federal government, if it finalizes a rule to limit arbitration. It noted that the Department of Defense issued a rule that updated its guidance of the Military Lending Act, a law which provides servicemember protections for certain lending products. Forced arbitration is banned from the terms of these lending products.
In addition, the 2010 financial reform law, passed in response to the devastating 2008 financial crisis, outright eliminated forced arbitration from residential mortgages and home-equity loans. The CFPB issued a rule implementing that provision. In another example, the federal government is also finalizing an Obama executive order that would shield government contractor employees from forced arbitration for certain employment claims.
4) Eliminating Forced Arbitration and Class Action Bans in Financial Services is Consistent with CFPB Study Findings.
The Dodd-Frank Act specifically authorizes the CFPB to write a rule to limit or restrict forced arbitration in a way that’s consistent with the study. The CFPB launched its study on the use of forced arbitration in financial services contracts in spring 2012 and completed it three years later. Consumer advocates have long been aware of the consequences to consumers and the markets caused by their lack of access to justice, but the CFPB’s findings brought light to some of the darkness in forced arbitration, specifically in the financial services sector.
The findings demonstrate a fundamental lack of access to justice for consumers. As a result, the financial marketplace may finally benefit from much-needed action to fix serious problems. The agency said it: “The Bureau believes that its Study is the most comprehensive empirical study of consumer financial arbitration ever conducted.”
5) Bank Customer Service is Not All It’s Cracked Up to Be.
Bank lobbyists contend that their clients’ customer service departments (or as the CFPB put it, “informal dispute resolution systems”) often solve individual consumer complaints, so consumers really don’t need to go to court.
The CFPB refutes the industry’s bogus claim: “Companies’ informal systems are voluntary and are primarily designed to benefit those consumers who pursue them. Many more consumers (emphasis mine) may be harmed by the same wrongful practice without realizing it or without filing their own disputes … Also…companies can choose not to resolve disputes raised by customers who complain or can resolve disputes with those customers while maintaining practices that violate the law or harm consumers who never complain.”
Banks’ recent abusive overdraft fee practices are a palpable example. In a class action against one bank, the California court noted in its recitation of the facts that individual consumers complained to the bank about the order in which the bank would clear account expenditures. In the court’s words, the bank built “a trap that would escalate a single overdraft into as many as ten through the gimmick of processing in descending order. It then exploited that trap with a vengeance, racking up hundreds of millions off the backs of the working poor, students, and others without the luxury of ample account balances…”
The bank might have helped those relatively few consumers who complained to customer service about its conduct, but it continued the practice on others. In a class action, the court ordered the bank to return $203 million to consumers. It’s clear which device (customer service or the class action) worked better for consumers and the market.
Forced Arbitration Will Still Exist Under CFPB’s Proposal
There’s a snag. The CFPB has declared that its research proves that class action bans in contracts are a bane for consumer remedies and for the marketplace. The CFPB proposes not to eliminate arbitration clauses. Instead it plans to regulate arbitration clauses by restricting class action bans. Make no mistake. This action would be a giant leap for the restoration of consumers’ access to court as well as corporate accountability.
However, forced predispute arbitration clauses in take-it-or-leave-it contracts have little or no redeeming value for consumers, even without class action bans. It’s worth noting that the CFPB has indicated willingness to monitor certain arbitrations and bring some transparency to the process.