Forced Arbitration: A Sneaky Rip-Off
Update: The CFC submitted a letter in strong support of the proposed rule to the Consumer Financial Protection Bureau on August 22. View it here (pdf).
When a bank or other financial institution engages in unfair, deceptive or downright abusive rip-offs, consumers should get their day in court. Most of the time, we are out of luck.
That’s because legal fine print snuck into most consumer contracts forces us to take a complaint before an arbitrator. Arbitration is a private dispute resolution system that is dominated by the company. The rules of courtroom justice don’t apply in an arbitration hearing. Arbitrators rarely bite the corporate hands that feed them.
Until a few years ago, California and other states restricted the enforcement of mandatory arbitration clauses if deemed oppressive when a consumer lacks the bargaining power to renegotiate the contract terms. In 2011, a 5-4 majority of the U.S. Supreme Court ruled that an obscure federal law from the 1920s preempts the ability of states to limit the imposition of a mandatory arbitration clause in a contract.
The case involved a claim that AT&T deceived cell phone customers about a hidden $30.22 fee. In a class action lawsuit, the total fee dispute could have approached a billion dollars. Consumers would have been assured of an impartial hearing and excellent legal representation. But individually, almost no one would go to the trouble to hire the legal talent to argue the case and maybe recoup a few bucks in a company-defined private hearing. That didn’t trouble the Supreme Court majority.
Armed with a get out of jail free card from the Supreme Court in this case and in a subsequent decision, mandatory arbitration clauses have become pervasive in consumer contracts running the gamut from auto purchases to phone and cable TV subscriptions, gym memberships, hospital and nursing home admission agreements, mortgages, loans and bank accounts, and virtually every other consumer service or big-ticket purchase. General Mills tried to impose mandatory arbitration on any customer who bought a box of Cheerios and “liked” the product on Facebook, and only backed down after widespread public ridicule.
For most services, acquiescing to the company’s mandatory dispute arbitration terms is a “take it or leave it” reality. In the financial services arena, if you refuse to agree to mandatory arbitration of any unknown complaint that may arise in the future, it means that you can’t get a mortgage, bank account, credit card, or automobile loan. Richard Cordray, Director of the Consumer Financial Protection Bureau (CFPB), called mandatory arbitration a “contract gotcha that effectively denies groups of consumers the right to seek justice and relief for wrongdoing.”
Here’s the good news: After an exhaustive study of the extent and effects of these contract clauses, the CFPB has proposed a new rule that would ban most instances of mandatory arbitration for consumer financial services. Instead of a deck stacked against us, the CFPB proposal allows consumers who are wronged to band together and file a class action lawsuit. The CFPB can do this despite the bad Supreme Court rulings because the Dodd-Frank Act specifically granted the agency this authority. The proposed rule would restore our right to a fair hearing for our complaints against banks.
Consumer Federation of California has joined with 163 other public interest groups to urge the CFPB to adopt the strongest possible prohibition on forced arbitration. The public has until August 22, 2016, to comment on the CFPB’s proposed regulations.
Financial institutions are lobbying hard to stop the new rule in its tracks. They want to keep pocketing billions in undeserved income by derailing lawsuits by injured consumers. We can’t let them win.