Is This the End of Mandatory Arbitration?

class-action-lawsuit

Federal regulators moved one big step closer Thursday to banning contract language that prohibits consumers from joining class-action lawsuits against corporations.

The Consumer Financial Protection Bureau today issued a formal Notice of Proposed Rulemaking on the ban, opening a 90-day public comment period that’s sure to attract heavy rhetoric from both sides of the issue.

Consumer groups favor the ban, saying arbitration clauses in standard contracts prevent wronged consumers from having their day in court; industry groups say arbitration is more cost effective than class-action lawsuits. A CFPB field hearing will be held Thursday in New Mexico.

“Signing up for a credit card or opening a bank account can often mean signing away your right to take the company to court if things go wrong,” CFPB Director Richard Cordray said in a statement. “Many banks and financial companies avoid accountability by putting arbitration clauses in their contracts that block groups of their customers from suing them. Our proposal seeks comment on whether to ban this contract gotcha that effectively denies groups of consumers the right to seek justice and relief for wrongdoing.”

The proposed ban has a long legislative and political history. It was initiated by the Dodd-Frank financial reform bill, which instructed the Consumer Financial Protection Bureau to study the issue and make rules after the study as needed. (The CFPB study was released in March 2015.) The bureau then released its first version of the potential rule and convened a commission to study its impact on small business last fall. The group’s report was also made public on Thursday.

Consumer groups were quick to cheer the rule.

“Forced arbitration is a get-out-of-jail-free card that lets banks, payday lenders and debt relief scammers avoid accountability when they violate the law,” said Lauren Saunders, associate director of the National Consumer Law Center. “Forced arbitration and class action bans force consumers into a biased, secretive and lawless forum, preventing either a court or an arbitrator from ordering a lawbreaker to repay all of its victims.”

Stern objections can be expected from industry groups such as the U.S. Chamber of Commerce. In advance of Thursday’s field hearing, the chamber’s Center for Capital Markets Competitiveness wrote the CFPB asking Cordray to address some issues with the rule.

In the letter, signed by David Hirschmann, President and CEO of the center, the group questioned “whether a rule prohibiting class action waivers will have the practical effect of eliminating consumer arbitration from the financial services marketplace.”

It also stated eliminating arbitration would actually make it harder for consumers to obtain redress in situations where claims were small and too infrequent to result in a class-action lawsuit.

“For these claims, consumers will therefore have virtually no economically rational options for seeking redress: arbitration (in which most companies pay for consumers to bring claims against them, making it free to the consumer) will be gone; class action litigation will not be available; and rational consumers are not going to pay a $400 filing fee to pursue a $25 claim in court,” the letter stated.

Such consumers could potentially file small claims court claims, which can cost considerably less, however.

Here are some reasons the CFPB claims its rule will be good for consumers, per a press release.

A day in court: The proposed rules would allow groups of consumers to obtain relief when companies skirt the law. Most consumers do not even realize when their rights have been violated. Often the harm may be too small to make it practical for a single consumer to pursue an individual dispute, even when the cumulative harm to all affected consumers is significant. The CFPB study found that only around 2% of consumers with credit cards who were surveyed would consult an attorney or otherwise pursue legal action as a means of resolving a small-dollar dispute. With class action lawsuits, consumers have opportunities to obtain relief from the legal system that, in practice, they otherwise would not receive.

Deterrent effect: The proposed rules would incentivize companies to comply with the law to avoid group lawsuits. Arbitration clauses enable companies to avoid being held accountable for their conduct. When companies know they can be called to account for their misconduct, they are less likely to engage in unlawful practices that can harm consumers. Further, public attention on the practices of one company can affect or influence their business practices and the business practices of other companies more broadly.

Greater transparency: The proposed rules would make the individual arbitration process more transparent by requiring companies that use arbitration clauses to submit any claims filed and awards issued in arbitration to the CFPB. The Bureau would also collect correspondence from arbitration administrators regarding a company’s nonpayment of arbitration fees and its failure to adhere to the arbitration forum’s standards of conduct. The collection of these materials would enable the CFPB to better understand and monitor arbitration. It would also provide insight into whether companies are abusing arbitration or whether the process itself is fair.

You can read more about the credit laws that are on your side here.

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Image: Pierre Desrosiers

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