The Consumer Financial Protection Bureau may be preparing to ban mandatory arbitration clauses in consumer finance agreements, Bloomberg News reported on Friday (March 20).
That’s in the wake of a three-year, 728-page study published by the CPFB this month that confirmed what opponents of the clauses have been saying for a decade: Mandatory arbitration doesn’t help customers much, but does block expensive lawsuits against banks. The clauses require customers to use arbitration, not the courts, to resolve disputes, and also requires them to waive their right to be part of class-action lawsuits.
Of the 50 largest U.S. banks (measured by domestic deposits), 28 (or 56 percent) require checking account holders to submit disputes to arbitration, including JPMorgan Chase and Wells Fargo. Of the next 50 biggest banks, 15 (or 30 percent) do so, according to a 2012 study by Pew Charitable Trusts. That made it possible for the CFPB study to compare the effects of having and not having the clauses.
While arbitration is touted as a win-win situation for banks and consumers because it cuts out legal costs associated with lawsuits, it also eliminates most small claims, the CFPB found. Only 52 arbitration claims under $1,000 were filed in 2010 and 2011, and consumers won relief in only four of them.
Of the other 1,008 financial-product arbitration disputes filed in 2010 and 2011, consumers received a combined $175,000 in damages and $190,000 in debt forbearance. The cases also resulted in consumers being ordered to pay $2.8 million to financial companies, most of it to cover disputed debts.
But in cases where class-action lawsuits were not banned by the clauses, about 32 million consumers each year were eligible for financial relief over a five-year period, the CFPB found. The settlements were worth $2.7 billion in total, with about 18 percent ($486 million) of that going to lawyers and the remainder (more than $2.2 billion) going to consumers.
Exactly what the CFPB may propose isn’t yet clear. The bureau could ban mandatory arbitration clauses in consumer finance contracts outright, or it might only do away with the clauses that block consumers from participating in class-action lawsuits. “These arbitration clauses restrict consumer relief in disputes with financial companies by limiting class actions that provide millions of dollars in redress each year,” CFPB Director Richard Cordray said in a prepared statement. “Now that our study has been completed, we will consider what next steps are appropriate.”
The CFPB was required to complete the report before issuing new regulations, but that will undoubtedly not be the end of the road. The rule-making process and the fight with banks, the U.S. Chamber of Commerce and other arbitration-clause supporters could drag on for years, according to Bloomberg.