CFPB Takes on Mandatory Arbitration Clauses

April 30, 2012

The Consumer Financial Protection Bureau (CFPB) opened its doors less than a year ago. Even though the federal agency was created in July, it announced last week that it would be taking on a major issue: mandatory arbitration clauses and the companies that enforce them.

The CFPB is conducting a study to determine how arbitration clauses affect both consumers and companies. CFPB Director Richard Cordray said, “We want to learn how arbitration clauses affect consumers, and how effective arbitration is in resolving consumers’ issues. This inquiry will help the Bureau assess whether rules are needed to protect consumers.”

Today, most Americans are bound by at least one mandatory arbitration clause, although arguably most are not even aware. Mandatory arbitration clauses, which can be found in contracts for banks, credit cards, and cell phone companies, state that should a consumer have a dispute, the matter must be settled out of court with a private arbitrator. Also, because of a recent Supreme Court decision, most arbitration clauses contain mandatory bans on class actions.

While companies tout this alternate dispute resolution as the faster and cheaper way to resolve disputes, the high cost to the consumer, limited discovery, inconvenient venues and limited judicial review meld to create a bias against consumers.  In other words, whatever cost savings companies cite as justifying arbitration are realized by the companies themselves, not consumers.  Moreover, a 2007 report by Public Citizen found that  corporations won 95% of the time when they appeared before the National Arbitration Forum (NAF), one of the United States’ largest dispute resolution companies. The NAF in July 2009 announced it would no longer administer consumer arbitration disputes after it was sued by the Minnesota Attorney General.

For purposes of conducting the study, the CFPB is gathering public comments about:

  • The prevalence of arbitration clauses in consumer financial products and services;
  • What claims consumers bring in arbitration against financial services companies;
  • If claims are brought by financial services companies against consumers in arbitration;
  • How consumers and companies are affected by actual arbitrations; and
  • How consumers and companies are affected by arbitration clauses outside of actual arbitrations.

The CFPB’s questionnaire can be found here. Comments regarding this study must be submitted by June 23.

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