The CFPB Can and Must Act To Protect Low-Income Consumers of Color From Predatory Financial Service Providers

By Martha Perez-Pedemonti and Candace Milner  

Many of us sign terms of service contracts without a second thought — the language is full of jargon, the font is tiny, and potential consequences can feel vague. But abusive and predatory terms inserted in those contracts, including forced arbitration clauses, can have real consequences for consumers. When used by unscrupulous financial service providers, they have an especially negative impact on low-income BIPOC communities.  

Deceptive business practices are likely to target members of low-income BIPOC communities who are vulnerable due to a confluence of factors including low bargaining power, limited or bad credit history, limited choices in financial providers, and obstacles to processing information (including language and accessibility barriers). Because consumers often do not read the terms of service contracts until after a problem has arisen, they find themselves unknowingly bound by predatory clauses inserted into terms of service contracts.  

Forced arbitration clauses require consumers to resolve any disputes that might arise in the future between them and the company through private arbitration, rather than in a public court. It is nearly impossible to avoid forced arbitration provisions. For example, in 2022 approximately 85% of major credit cards included forced arbitration clauses in their terms of service agreements.  

For low-income BIPOC families, signing forced arbitration clauses forces them to engage with arbitration firms that do not provide adequate resources to support low-income BIPOC individuals. Arbitration forums are inaccessible and the pools from which arbitrators are neither diverse nor inclusive, which too often results in bias against BIPOC litigants.  

Forced arbitration keeps lower-income marginalized groups from joining in class action and other forms of aggregate litigation to bring small-value and cost-sharing litigation claims before the courts. By barring access to the courts, financial service providers actively keep marginalized communities from obtaining monetary relief from valid legal claims, potentially further entrenching racial wealth gaps.  

Courts are a key avenue for consumers to seek accountability when wronged by financial institutions. Although far from perfect, public courts offer low-income BIPOC litigants access to important resources that assist them in engaging the legal system and pursuing legal claims. First, court proceedings are public and subject to scrutiny from legislators, the media, bar associations, and the public. Second, jury pools tend to be more diverse than arbitration pools and offer more thoughtful consideration of racial prejudices. Third, depending on the jurisdiction, courts offer access to civil legal assistance programs and language access assistance.   

The Consumer Financial Protection Bureau (CFPB) must follow its mandate to protect all consumers from unfair, deceptive, or abusive practices by banning pre-dispute arbitration clauses in the terms and service agreements of financial products. The CFPB has the power to do so under the Dodd-Frank Wall Street Reform and Consumer Protection Act. Forced arbitration clauses are unfair to all consumers and are especially damaging to our most vulnerable communities, including low-income BIPOC communities. Banning forced arbitration in financial services would be the first step toward granting consumers access to equitable and financial relief.