Feb. 23, 2015
MEMO TO REPORTERS
Consumer Financial Protection Bureau Should Prohibit Companies From Forcing Consumers to Give Up Right to Go to Court
Agency Study on Forced Arbitration Clauses Due Out Soon
Any day now, the U.S. Consumer Financial Protection Bureau (CFPB) will release the findings of its lengthy study on the use of binding mandatory arbitration in consumer financial services contracts.
Called forced arbitration, these ubiquitous clauses require people to seek redress for wrongdoing not in courts of law – with the right to have their case heard by a jury, guarantees of due process and the ability to engage in robust discovery – but in company-selected arbitration proceedings.
In its preliminary findings, released in 2013, the agency determined that millions of consumers are subject to forced arbitration provisions in their credit card, checking account, payday loan and prepaid card contracts. Virtually all arbitration clauses in these financial institutions’ contracts prohibited customers’ participation in class actions. The agency also found that very few consumers initiated individual arbitrations, while in just a handful of class-action settlements, millions of consumers received financial relief.
These preliminary findings essentially mean that consumers are denied any effective remedy when forced into individualized arbitration to resolve disputes. The final report, agency director Richard Cordray told an audience at the Brookings Institution in January, will be out “in the fairly near future.”
The agency can provide a remedy: The CFPB is specifically authorized under the Dodd-Frank Wall Street Reform and Consumer Protection Act to restrict the use of forced arbitration in terms of service for checking accounts, credit cards, prepaid cards, student loans, payday loans, debt settlement services, and other financial services and products within its purview.
We urge you to let your readers know about the Consumer Financial Protection Bureau’s plan to prohibit the use of forced arbitration clauses in consumer products, and to explain how it will affect them.
The Problem of Forced Arbitration and Class-Action Bans in Consumer Financial Services
Forced arbitration poses a serious and pervasive threat to consumer rights. Buried in the service terms of an unbelievably broad array of standard form contracts – including online click-through contracts – are clauses that bar individuals from suing companies that wrong them.
Forced arbitration clauses do not facilitate consumer choice of arbitration. Instead, they force consumers to forego their constitutional right to a jury trial as a condition to obtaining service from a company. Further, surveys and studies have concluded that consumers are mostly unaware of the existence and meaning of the clauses.
Perhaps the worst elements of the arbitration clauses are prohibitions on class actions – preventing consumers from banding together over shared wrongs. For low-dollar grievances against a service provider, this effectively means there is no remedy available. Unless motivated by a very acute sense of justice, almost no rational consumer will bring a legal action on their own over an improper $8 charge, or even a $300 rip-off. The dollar and time costs are just too great.
Previously, state rules and other legal doctrines blocked many forced arbitration abuses. However, over the past two decades, the U.S. Supreme Court expanded its interpretation of the 1925 Federal Arbitration Act (FAA), expressing a strong federal preference for arbitration and pre-empting state laws that attempted to curb the practice and preserve consumer rights. In its 2011 AT&T Mobility v. Concepcion decision, the court went even further and explicitly ruled that state laws could not be used to overturn class-action bans contained in arbitration clauses, even in cases where each individual suffered a small-dollar loss and could not reasonably seek remedies on their own without a class action.
Similarly, in another Supreme Court decision, American Express v. Italian Colors, decided in 2013, small businesses alleged that American Express violated federal antitrust laws related to its credit and charge cards. The Supreme Court held that the arbitration clause and class-action ban in the American Express contracts prohibited the small businesses from banding together in a class action against American Express, despite the fact that the smaller companies had proved it would have been too costly for each of them to arbitrate against American Express on an individual basis.
Forced arbitration is a particularly severe problem in the consumer financial sector, where low-dollar abuses are commonplace. The CFPB is conducting a congressionally mandated, extremely detailed investigation of the issue. It issued preliminary findings in December 2013, reporting that:
• Just over 50 percent of credit card loans outstanding are subject to such clauses (although the number would have been 94 percent but for a settlement in which certain banks agreed to forego such terms for a set period of time);
• Around 80 million credit cardholders were subject to arbitration clauses as of the end of 2012;
• Tens of millions of households are subject to arbitration on one or more checking accounts. Eighty-one percent of the prepaid cards studied, and all of the cards for which market share data are available, have arbitration clause; and
• Virtually all arbitration clauses prohibit class actions.
The CFPB also concluded that forced arbitration provisions effectively mean that consumers are denied any effective remedy. It found that consumers do not avail themselves of arbitration or file claims in small claims court. Specifically, the CFPB found:
• Consumer-initiated arbitration is extremely rare, totaling approximately 300 individual cases per year;
• Almost no cases are filed with less than $1,000 in dispute;
• Arbitration provides relief to almost no consumers harmed by illegal or abusive practices in the financial services industry; and
• On the other hand, the CFPB identified eight class-action damages settlements and found that more than 13 million class members made claims or received payments under these settlements. Total payments or debt relief to the classes were in excess of $350 million, exclusive of attorneys’ fees and the value of injunctive relief.
Particularly in consumer financial services, Congress specifically provided for a private right of action in consumer protection laws, such as the Credit Repair Organizations Act, Electronic Fund Transfer Act, Fair Credit Reporting Act, Fair Debt Collection Practices Act, Servicemembers Civil Relief Act and Truth in Lending Act. These laws grant consumers the specific right to seek remedies on their own, and many of them contemplate the use of class actions for consumers to band together to seek remedies for similar losses caused by the same corporate misconduct. Yet, according to the Supreme Court, the FAA overrides these laws.
In November 2014, 16 state attorneys general sent a letter to the CFPB encouraging the agency to use its authority to write a rule on forced arbitration in consumer financial services “to ensure that consumers have a meaningful avenue for redress.” The attorneys general touched on the procedural unfairness of arbitration, including arbitrators’ incentive to decide in favor of their repeat customers – the businesses that name them in contracts. The attorneys general also discussed the usefulness of consumer class actions for small-dollar financial claims and the importance of individuals being able to band together to hold companies accountable and to effect changes to bad business practices through injunctive relief.
“While it is true that the issues associated with mandatory arbitration are wide-reaching and that further legislative action is required to fully address the problem, the Bureau has the unique opportunity to do something in the important area of consumer financial products and services. The time is ripe to do so,” the attorneys general concluded.
State and federal government agencies often are constrained by limited funds and unable to pursue every bad practice on their own. On the other hand, private lawsuits boost public state and federal enforcement and can benefit the public interest on a larger scale without burdening taxpayers.
From Their Own Words, Courts’ Hands Are Tied
Courts around the country have expressed sympathy to consumers’ restricted access to court but their hands have been tied by the Supreme Court’s expansive interpretation of the FAA.
Oregon consumers Gary and Tina Willis tried to represent themselves and others in a class action against businesses operating as “debt negotiation” service providers. The court held that a class-action ban in one of the contracts between consumers and the providers was valid but also said: “[T]he vast majority of numerous, small-value claims … for statutory violations will go unprosecuted unless they may be brought as a class due to the high costs associated with pursuing individual claims … This court is sympathetic to the Willises’ argument. Regrettably, AT&T forecloses many consumer class actions which may provide the only recovery for wronged individuals.” Willis v. Debt Care, USA, Inc. et al. (2011).
In a case filed by Kentucky consumers against an Internet service provider, the court enforced the class-action ban in the contract, stating: “[U]pon application of Concepcion, we are now constrained to conclude that under contracts like the one now before us, which contain a class action waiver and also require disputes to be arbitrated under the FAA, the federal policy favoring arbitration preempts any state law or policy invalidating the class action waiver as unconscionable based solely upon the grounds that the dispute involves many de minimis claims which are, individually, unlikely to be litigated … We, of course, yield as we must to the United States Supreme Court’s interpretation of federal law.” Schnuerle v. Insight Communications, Inc. (2012).
Students in Tennessee sued a for-profit college in a class action. The court granted the school’s motion to compel arbitration and deny the students’ class action. The court said: “While required by the FAA, this result strikes the court as manifestly unjust and, perhaps, deserving of legislative attention. [I]n cases such as the one presented here, requiring impoverished individuals to arbitrate could effectively prevent them from exercising their rights as state citizens.” Dean v. Draughons Junior College, Inc. (2013).
The ideal solution to this problem would be a federal prohibition on forced arbitration provisions in consumer and employment contracts. Arbitration offers benefits in some cases, but both parties should agree knowingly and voluntarily, after a dispute has arisen, in instances where the parties adjudge that it makes sense for them to forego the right to a jury trial and the procedural guarantees of our civil courts.
In the last congressional session, the Arbitration Fairness Act (H.R. 1844, S. 878) was introduced by U.S. Sen. Al Franken (D-Minn.) and U.S. Rep. Hank Johnson (D-Ga.). The measure would have banned forced arbitration provisions from consumer and employment contracts.
More immediate relief is available from the CFPB. Once the agency completes its study on forced arbitration – which reportedly should be fairly soon – it will be authorized to end forced arbitration provisions in consumer financial contracts.
Although any CFPB action on the issue will be furiously opposed by corporate financial interests who want to retain this undeserved and unchecked power, the agency has a huge opportunity to restore consumers’ rights in the financial services sector.