To CFPB on Opening Day: Study It (Forced Arbitration), Then Ban It

For a long time, consumers needed help to fend off prevalent and predatory practices by players in the financial services industry (think abusive payday lending and illegal home foreclosures). Finally, we can all celebrate the official opening today of the Consumer Financial Protection Bureau, which promises to serve as watchdog against bad behavior in the industry. Yet, there is one particularly bad practice – forced arbitration – that if eliminated now, would facilitate the rest of the agency’s mission to “make markets for consumer financial products and services work for Americans.”

The financial services industry –that is banks, mortgage servicers, investment companies and the like — are notorious for inserting clauses in the fine print of their contracts that prohibit their consumers from pursuing claims for wrongdoing against them in court, forcing them to resolve disputes in arbitration. Without having a chance to negotiate contract terms, consumers and investors are ushered into a private system where the corporation choose the arbitration firm, the venue, and the rules governing the process to resolve disputes.  It takes little imagination to guess how consumers fare in forced arbitration. Typically, they lose.

In 2008, Elizabeth Warren, founder, creator, designer, mother, and inventor of the CFPB, said of forced arbitration: “When Congress promoted arbitration with the Federal Arbitration Act, most people thought it provided a good alternative to expensive litigation for equally powerful parties. But today an arbitration clause slipped into the 30+ pages of incomprehensible language in a credit card agreement (or other financial services contract) will mean that a customer has waived her rights to a class action…”

Fortunately for consumers, (all of whom should never be forced into arbitration), the Dodd–Frank Wall Street Reform and Consumer Protection Act came along. Passed in Congress and signed by the president in 2010, it authorized the CFPB and included a few intriguing tasks for the new agency on the topic of forced arbitration.

Section 1028 of Dodd-Frank gives the CFPB discretion to ban or limit forced arbitration in certain financial service contracts if it finds that it would be “in the public interest and for the protection of consumers.” But before it acts, the agency must study the issue and make recommendations to Congress.

Admittedly, it is a modest approach to solving the forced arbitration problem in the financial services sector. Given the well-documented unfairness of forced arbitration for consumers, a more fearless Congress would have banned forced arbitration clauses outright, as it did with mortgage contracts. But, Congress’ acknowledgement of the problem and its willingness to give an agency authority to pursue solutions, is, in short, better for consumers than nothing at all. 

So, on this grand opening day for the Bureau, we hope that Richard Cordray, the president’s nominee to lead the agency, will act quickly on forced arbitration. He and his staff should study, study, study the issue (we know what they will find), and then move to eradicate the clauses.

In other words, heed the valuable lesson of Ms. Warren: “We (consumers) need some protection here so that we don’t pre-lose every dispute that comes up.”