This week, the Consumer Financial Protection Bureau released a final report detailing the use of forced arbitration agreements in consumer financial services contracts. As we wrote last week, these clauses – which prevent consumers from being able to sue in court – significantly reduce options for consumers when creditors violate consumer protection laws.
According to the agency’s report, the widespread use of these clauses has worsened outcomes for consumers disputing the actions of companies, but has not reduced the cost of credit. The report also found that the majority of consumers did not know whether their contracts subjected them to such a requirement or what its terms were. Compared to a small claims court case, arbitration is generally expensive, is secretive, lacks resources for unsophisticated consumers, and leaves almost no opportunity for appeal. The clauses also often prohibit consumers from proceeding in a class action, whether through litigation or arbitration.
Companies, which go to arbitration regularly and for whom this process was designed, benefit from the so-called “repeat player effect” over consumers who will likely encounter the process only once or twice in their lives. The lack of procedural safeguards for consumers often means that consumers cannot effectively enforce their substantive legal rights. In certain markets, like that for credit cards, nearly every company insists upon a forced arbitration clause, giving consumers no real choice.
While this report is an important step in understanding the use of forced arbitration clauses, the CFPB is empowered to go further. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act that created the agency, the CFPB can prohibit or place restrictions on forced arbitration clauses for particular types of financial products or for all consumer financial services.
The National Consumer Law Center and the National Association of Consumer Advocates have created a petition calling on the CFPB to use its authority and put an end to the use of forced arbitration in consumer contracts. Because of a federal law called the Federal Arbitration Act, only action by Congress or the CFPB can truly address the problem of consumer abusers shielding themselves from liability with a forced arbitration clause.