Mandatory pre-dispute arbitration clauses are “deliberately designed to block Americans from effective means of vindicating their rights” and are “having profound effects on American life,” according to Consumer Financial Protection Bureau (CFPB) Director Richard Cordray in a recent address at the American Constitution Society in Washington, D.C.
In October 2015, the Bureau announced that it is considering a proposal that would prevent consumer financial companies from using “free pass” arbitration clauses that would prevent consumers from bringing class action lawsuits to obtain relief. These arbitration clauses are typically buried in contracts for consumer financial products and deny consumers the right to sue companies in groups. Companies can use the “free pass” to avoid class action lawsuits from consumers that would require them to hand out big refunds, according to CFPB.
“These important clauses have often been buried deep in the fine print of contracts for consumer financial products and services, such as credit cards, bank accounts, payday loans, and private student loans,” Cordray said in his address at the American Constitution Society. “And though they are nearly invisible to most people, they are having profound effects on American life. Some of the broader ramifications are surprising and even breathtaking in their scope. But now both the Congress and the courts are beginning to turn away from the extreme philosophy that says a take-it-or-leave-it provision buried deep inside a form contract can nullify an individual citizen’s ability to vindicate rights conferred on them by federal and state law.”
Cordray noted that judicial doctrine on arbitration has evolved to favor arbitration, but Congress still has the authority to adopt laws to regulate the dispute resolution process.
The director also pointed out that Congress sought to limit the power of arbitration in the Dodd-Frank Act of 2010, stating that “Congress expressly prohibited the inclusion of arbitration clauses in most residential mortgage loan contracts. It gave the Securities and Exchange Commission authority to prohibit or restrict use of such clauses for certain disputes, if it finds that doing so would be in the public interest and for the protection of investors.”
Congress also directed the CFPB to conduct a study (released in March 2015) on the use of pre-arbitration clauses in consumer financial contracts; Cordray spoke extensively of the 728-page study in his address, noting that it was based on extensive information compiled from thousands of federal and state court cases and also data analyzed from the country’s largest arbitration forum. The CFPB’s study revealed that “tens of millions” of American consumer are covered by one or more arbitration clauses, and that the “vast majority” of these consumers did not even know the clauses exist.
“Importantly, our study showed that arbitration clauses restrict consumers’ relief in disputes with financial service providers because companies are using them to block class proceedings in any forum—whether court or arbitration,” Cordray said. “This affects consumers’ access to justice because group proceedings are often the only practical way to seek relief for relatively small claims.”
He stated that the results of the report “show that arbitration clauses severely limit consumers’ options to pursue a just resolution of their disputes, to their detriment and without their knowledge.” Cordray said based on the findings of the study, the Bureau has decided to launch a rulemaking process to protect consumers by limiting the extend to which arbitration clauses can be used.
Click here to view the full text of Cordray’s address.