If you ask a company representative if they think arbitration clauses are harmful to consumers, more than likely, they will say no. If you ask the average consumer if they think arbitration clauses are harmful to consumers, they will ask you what is an arbitration clause? If you ask the Consumer Financial Protection Bureau (“CFPB”) to conduct a study about the use and fairness of arbitration clauses in consumer contracts, it will give you this: A 728 page report that overwhelmingly shows that arbitration clauses are harmful to consumers. CFPB director Richard Cordray shared the findings from this report in a field hearing on Tuesday.
The CFPB study, which began almost three years ago, was a congressional mandate relating to section 1028 of the Dodd-Frank Act. The CFPB was directed to study and provide a report to congress on the use of arbitration clauses in consumer financial contracts. This study included thorough analysis of hundreds of arbitration agreements, thousands of arbitration disputes and federal and state consumer finance cases, hundreds of class action settlements and a survey of 1,000 credit card consumers.
What is obvious in the report is what has been readily apparent to us and consumer advocates for years: Forced arbitration does not benefit the consumer. Proponents of forced arbitration like to say that arbitration is fair and even beneficial to consumers, however, the CFPB’s research concluded the following:
- Arbitration agreements affect a large number of consumers – for instance, as much as half of all credit card debt and checking account deposits are subject to arbitration agreements.
- Three out of four consumers surveyed did not know if they were subject to an arbitration clause.
- [The CFPB] found no evidence that arbitration clauses lead to lower prices for consumers.
- Consumers are very reluctant to bring claims against companies on their own, particularly small claims.
- Roughly 32 million consumers on average are eligible for relief through consumer financial class action settlements each year.
If consumers are unlikely to bring small claims against companies yet are nickel-and-dimed by said corporations, does that mean they do not deserve redress? Class actions are a viable way for consumers to achieve relief of this kind, yet arbitration proponents like to argue that class actions do little more than line the pockets of greedy plaintiffs attorneys. Consider these findings:
“Between 2010 and 2012, there were a total of 72 arbitration disputes filed with the American Arbitration Association and 137 individual cases filed in federal courts involving checking accounts. Yet during those same three years, six class settlements were approved involving the overdraft practices of five banks. The settlements totaled close to $600 million and covered more than 19 million consumers. The cases also resulted in changes to overdraft practices going forward – changes that brought material benefit to consumers.”
The numbers are staggering. If six class actions can bring relief to 19 million consumers and result in changes to company practices that benefit consumers, that seems to be a better avenue for consumers than individual arbitration. The problem is nearly all arbitration clauses also contain class action bans, forcing individuals to take on large corporations alone. How is that fair?
From here, it is not completely clear what the CFPB’s next steps will be. Congress stated in its Dodd-Frank directive that the bureau could “prohibit or impose conditions or limitations on the use of arbitration clauses” if it is “in the public interest and for the protection of consumers.” We hope in light of these findings that the CFPB will march forward and continue the directive congress gave it: to protect consumers and restrict the use of arbitration clauses.
If you have had experience with arbitration, the CFPB wants you to share your experience. And if you want to encourage the CFPB to ban forced arbitration, you can sign this American Association for Justice petition. You can view Wexler Wallace’s previous blog posts for more information on arbitration agreements here.