A Tool Consumers Need
New York Times
December 29, 2013
By THE EDITORIAL BOARD
The Consumer Financial Protection Bureau recently issued a report (http://files.consumerfinance.gov/f/201312_cfpb_arbitration-study-preliminary-results.pdf) on “pre-dispute” arbitration, also known as forced arbitration. That is the ubiquitous corporate practice of requiring consumers to agree in advance to use arbitration for any dispute that arises from a company’s products or services, rather than go to court.
Banks and businesses love forced arbitration, because it is a process they control for their own benefit. It shields them from accountability by closing the courthouse door to consumers. But no one should have to forfeit consumer protections and legal rights to use products and services.
In the Dodd-Frank law, lawmakers banned arbitration clauses in most residential mortgages. However, they did not prohibit them in other consumer financial contracts, and instead authorized the bureau to decide if a ban is warranted after completing a thorough analysis and reporting the findings to Congress.
The bureau’s report is the first step in that process. It presents initial findings on the use and complexity of forced arbitration clauses in checking accounts, credit cards, prepaid cards and payday loans. These findings are intended to serve as raw material for further analysis, but even the raw data is compelling.
The report found, for example, that most large banks put forced arbitration clauses in basic contracts and that 90 percent of those clauses bar both individual lawsuits and participation in class actions. This results in a systematic denial of justice.
In disputes over financial products — involving, say, excessive fees, inflated loan balances, faulty credit reporting, or fraud and discrimination — the damages at stake may be significant for an individual but not enough to warrant the cost of a legal challenge unless grouped in a class action. Forced arbitration also fosters abuse, since there is no check on wrongdoing that takes small amounts of money from potentially millions of customers.
To the extent that consumers are aware of their vulnerability, they have learned the hard way. In the past several years, the Supreme Court has repeatedly upheld arbitration clauses, leaving consumers with virtually no meaningful way to challenge corporate wrongdoing. Ideally, Congress would pass a law to remedy that injustice. For now, it is relying on the consumer bureau. To work its way toward an effective ban on forced arbitration, the agency need only follow where the evidence leads.