The Consumer Financial Protection Bureau (CFRB) issued a rule earlier this month that prohibits financial companies from using mandatory arbitration clauses to bar group actions for redress against those companies.
The rule will allow consumers to band together to sue financial firms for improper charges on bank accounts and credit cards. Presently, forced arbitration provisions in hundreds of millions of consumer finance contracts prevent group lawsuits.
In announcing the rule, CFPB Director Richard Cordray noted that, “when Wells Fargo opened millions of deposit and credit card accounts without the knowledge or consent of customers, arbitration clauses in existing account contracts blocked their customers from bringing group lawsuits for the unauthorized account openings.”
While it is not feasible for an individual customer to sue for recovery of a few hundred dollars for improper activity, when thousands of them can band together to recover for the same wrongdoing it is a different story. The new rule will make it feasible for customers to recover damages for improper conduct, while also forcing the financial companies to comply with the law in future business activity.
Mandatory arbitration in the financial sector is just the tip of the arbitration iceberg. Since the 1990s, forced arbitration clauses have been added to a wide array of consumer contracts that are presented to unsuspecting customers on a take-it-or-leave-it basis.
Families have been surprised when a mandatory arbitration clause prevents them from going to court when a loved one is abused in a nursing home. Such clauses are also common in contracts written by employers, medical providers, internet providers, cable companies, home builders and cruise ship operators, just to name a few.
Injured parties are deprived of the right to seek redress in impartial courts of law, to have a jury trial, and to appeal an unfair decision. Instead, they are often placed in the hands of an arbitrator who may be influenced by the prospect of getting repeat business from the defending party. This amounts to a privatization of the civil justice system and may be one of the factors that has caused a decline in civil case filings in the federal and state court systems around the country in recent years.
It should be said that arbitration is an important and efficient problem-solving mechanism where the parties stand on relatively equal ground and have knowingly agreed to arbitrate disputes rather than going to court. In past years, arbitration has primarily been resorted to in commercial disputes and works well there. The more recent and massive shift to arbitration in the consumer setting is troubling, however. Very few consumers are aware of mandatory arbitration clauses in the fine print of lengthy contracts or that by signing such contracts they are giving up the right to seek redress in court.
Congress has recognized the inequity of forced arbitration in some settings. In the Military Lending Act of 2007, mandatory arbitration was prohibited in certain loans made to servicemembers. The Dodd-Frank bill 3 years later did away with forced arbitration in most residential mortgages. However, the new CFPB rule has been met with threats of rejection by a number of members of Congress. On the administrative side, a rule proposed last fall that would have prohibited federally-funded nursing homes from forcing arbitration on patients and their families was derailed this year.
People should not be unwittingly deprived of their right to receive justice from the court system. Voters should demand that their elected representatives oppose mandatory arbitration in consumer contracts and, instead, support amendment of the Federal Arbitration Act to do away with forced arbitration in the consumer setting.
Jim Jones is a former Idaho attorney general and a former Idaho Supreme Court chief justice.