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CFPB Director Richard Cordray in 2013, Photo courtesy of H. Darr Beiser/USA Today

Another tentacle of the comprehensive 2010 Dodd-Frank financial reform law may provide consumers with more leverage in fighting against abuses by banks and other large financial institutions. The Consumer Financial Protection Bureau (CFPB) is considering regulation that would restrict the process of forced arbitration, which is outlined in the fine print of most checking accounts and credit card statements. The process prevents consumers from bringing disputes between the company and consumers through the court system, most likely through class-action lawsuits, and instead forces consumers to have individual disputes heard by a third party mediator whose opinion is binding often with no chance for appeal. Consumer groups claim that the mediators used are nearly always biased toward the company, which nearly always pays for the arbitrator’s services. According to a report that the CFPB sent to Congress in March, 75 percent of credit card customers were unaware of their card company’s arbitration procedures, and 7 percent of customers knew that their rights to sue were restricted due to the arbitration provisions. One component of Dodd-Frank required the CFPB to study the forced arbitration process and give the agency the authority to make changes if it sees a need.

As a result of the study, CFPB director Richard Cordray announced on Wednesday that the agency is outlining a proposal that would ban forced arbitration clauses ability to pre-empt the potential for a class-action lawsuit. The proposed regulation would not completely ban the practice in its entirety, but instead force to add a section that states that the arbitration procedures do not apply if a complaint has been certified by a judge for class-action litigation. Codrary said about the provision, “Under this proposed approach, consumers would again get their day in court to hold companies accountable for potential wrongdoing. We think that’s quite important.” The rule would also require companies to publicly post which claims have been brought to arbitration and the awards issued. According to the outlined proposal, the CFPB considered, but ultimately rejected, alternative proposals that would have eliminated forced arbitration altogether, as well as one to give the financial institution the option to resolve class-action complaints in front of a third-party mediator under “a reasonable standard of fairness;” however forbidding the institutions from using the arbitration clause to block consumers from being certified as a class.

For the most part, consumer groups announced their affirmation of the CFPB’s decision. Wednesday’s announcement at a public meeting in Denver was met with an overwhelming amount of cheers, despite some objections. George Slover of the Consumer’s Union branch of Consumer Reports Magazine said, “This proposal is a tremendous step toward cleaning up a system that has heavily favored companies over consumers who were wronged.” Ballard Spahr consumer finance lawyer Alan Kaplinsky said about the ruling, “If I was a consumer advocate against arbitration, and I was looking at what the CFPB proposed, I would be popping those champagne corks right about now.” Some however, like Public Citizen’s Congress Watch Division Lisa Gilbert was disappointed in the proposal because it did not ban the “pernicious” arbitration clauses completely. Among those who have criticized the cozy nature between arbitrators and financial institutions is Minnesota Attorney General Lori Swanson, who sued the National Arbitration Forum, which wrote many of the financial institution’s contracts, after she discovered in 2009 that a major debt collection company was owned by the same investors as the National Arbitration Forum. Since the lawsuit, the company has gotten out of the financial arbitration business, rebranding itself as “Forum,” and tackling business and technology mediation instead. In an interview, Swanson said “The Forum presented itself as this neutral party like our court system, but consumers didn’t know they were affiliated with same companies bringing the claims against them.”

Needless to say, the business and financial lobby has railed against the review and the resulting proposal. Earlier in the summer, the American Bankers Association, the Financial Services Roundtable and the Consumer Bankers Association issued a joint letter to the CFPB threatening that limiting arbitration will “result in increased costs to consumers for financial products and services” Instead the letter encouraged the CFPB to further educate consumers about arbitration clauses. President of the Consumer Bankers Association Richard Hunt released a statement on Wednesday saying, “Arbitration has provided consumers the benefits of quick and easy access to an affordable dispute resolution option for nearly 90 years,” referring to the foundational Federal Arbitration Act of 1925. Hunt added, “As a last resort, if legal recourse is necessary, arbitration has proven to be the best path forward because it is mutually beneficial to all parties — consumers and lenders.” While that sounds true in spirit, Swanson’s example is just one of many that the CFBP suspects to contain an improper relationship between the supposed-neutral party arbitrator and financial institution that pays them. Cordray alleged as much in Wednesday’s announcement, saying “Companies can sidestep the legal system, avoid big refunds, and continue to pursue profitable practices that may violate the law and harm countless consumers.”

 

 

Sources:

Business Insider – Ken Sweet/Associated Press

NPR – Chris Arnold

USA Today – Kevin McCoy

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