Yesterday, the Consumer Financial Protection Bureau (CFPB) issued its final study on forced arbitration, and the results are straightforward: A lengthy data-based study showed with finality that lenders use arbitration clauses to make it significantly more difficult for consumers who have been cheated or the victims of illegal conduct to get any relief. Still worse, most consumers who are subject to these forced arbitration clauses do not know about them or understand the rights they are giving up. In fact, only 7 percent understand that they can’t go to court.
{mosads}We’ve all been faced with the moment. You are signing an employment contract, buying a cell phone, signing up for a credit card or receiving a loan for a new car and you encounter pages of tiny font text with a requirement to sign before starting the job or procuring the corporate product you desire. The scary part? These take-it-or-leave it contracts that we all must sign often include dangerous clauses buried in the fine print that take away our rights. These clauses insist that the individuals that sign them (i.e., everyone) agree to give up their right to go to court if they are harmed by the company. Because the private system of forced arbitration benefits companies — and disadvantages consumers and employees — more and more industries are using this sort of forced arbitration clause to evade accountability. In an arbitration proceeding, there is no publicly accountable judge, jury or right to an appeal. The arbitrators do not have to follow the facts or the law, and there is no public review of decisions to ensure the arbitrator got it right. The contracts typically name the arbitration firm that must be used — the one preferred by the company. Arbitrators have a massive incentive to favor the company, which can give them repeat business — or not.
Yesterday, the CFPB released its final and critically important study on this problem, specifically examining the practice in consumer financial services. The CFPB’s report found that tens of millions of consumers are restricted by arbitration clauses.
The study was required by the Dodd-Frank Wall Street Reform Act in acknowledgment of the potential dangers of forced arbitration to consumers, and the results prove the wisdom of that requirement. The CFPB now has the authority to move forward on rule-making to deal with this problem in products like car loans, checking accounts, payday loans and credit cards. The study reiterated the fact that the fine print of millions of contracts contains forced arbitration clauses, which deprive consumers of their statutory and constitutional right to a day in court.
The CFPB study highlighted that forced arbitration clauses, and specifically those that prohibit class actions, are becoming standard business practice for corporate interests. In fact, the study confirms that the main impact of forced arbitration is to stop most injured consumers from getting any relief at all. For example, the CFPB looked at arbitration clauses in private student loans and found that 86 percent of the largest lenders include in their contracts arbitration clauses that prevent students from seeking recourse in court. The study also found that among mobile wireless providers who authorize third parties to charge consumers for services, 88 percent of the largest carriers include arbitration clauses. Those providers cover over 99 percent of the market.
Another disturbing fact brought to light by the study? Companies are now using the one-two punch combination of forced arbitration clauses and class action bans to also eliminate the ability of consumers to band together against corporate bad actors, which in many circumstances is their only means to vindicate their rights. Class actions can provide real and meaningful benefit to harmed consumers and can result in reforming bad business practices and furthering the public interest.
The good news is that the CFPB and its director, Richard Cordray, are now armed with the necessary data to act quickly to ban forced arbitration clauses and the associated class action limits in contracts for financial products and services. This rule is the quintessential function of the new consumer agency — it is an opportunity to protect consumers from a secretive practice rapidly becoming ubiquitous in the habits of big businesses, which harms average Americans.
The agency has a responsibility to its mandate to act, and should move quickly to fix this problem.
Gilbert is the director of Public Citizen’s Congress Watch division.