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Debt Settlement Services, Private Student Loan Lenders and Auto Lenders Continue to Escape Accountability By Using Forced Arbitration

Feb. 27, 2014

Debt Settlement Services, Private Student Loan Lenders and Auto Lenders Continue to Escape Accountability By Using Forced Arbitration

New Report Chronicles How Consumers Are Losing the Right to Challenge Financial Services Providers in Court

WASHINGTON, D.C. – Debt settlement services, private student lenders and auto lenders use forced arbitration to avoid answering for allegations that their misconduct has harmed their customers, a new Public Citizen report shows.

Public Citizen’s report, “Righting a Financial Wrong,” examines specific cases of consumers who were wronged by companies in these three areas, and their attempts to receive compensation in a court. Court documents in the cases show forced arbitration contract terms requiring consumers to resolve disputes in private arbitration, preventing consumers from seeking remedies against the companies in court.

“It’s a problem when players in the financial service industry can use broad contract terms to restrict consumers from seeking remedies in court,” said report author Christine Hines, consumer and civil justice counsel at Public Citizen. “When they force consumers to forfeit their legal rights, companies know they can get away with bad behavior.”

A series of recent U.S. Supreme Court decisions (AT&T Mobility LLC v. Concepcion (2011), Compucredit v. Greenwood (2012) and American Express v. Italian Colors Restaurant (2013) endorsed businesses’ use of arbitration clauses that prohibit class actions in standard consumer contracts. Consequently, the fine print leaves private individual arbitration as the only, and often impractical, option for relief.

Financial industry lawyers have publicly advised their clients that the elimination of class actions ? and impliedly, some corporate accountability – is possible through the use of a well-designed forced arbitration clause. Class actions are critical for consumers to obtain redress, because illegal fees and fraudulent charges common to the financial services sector often are too small to justify a consumer pursuing a case on her own, whether in court or arbitration.

In one case examined in the report, a consumer in Maryland alleged that an auto financing company violated the state’s consumer protection laws by imposing “undisclosed finance charges and employing other unfair business practices.” She sought a class action in state court. The consumer had executed a buyer’s order contract (which contained an arbitration clause) and a retail installment sale contract (which did not contain an arbitration clause) with the dealer. An appellate court said she would have to resolve her dispute in private arbitration. Her allegations against the company – allegations that may also affect other buyers – may never be heard in court.

The Consumer Financial Protection Bureau (CFPB) has monitored some of the shady activities in these industries, and its enforcement is indispensable, but agencies cannot police wily industry players alone. Indeed, state and federal consumer protection laws value private legal actions to beef up corporate accountability for predatory financial practices. Most of these laws specifically contemplate the use of class actions, and permit actual and punitive damages, and attorneys’ fees as awards for consumers who successfully prove their claims in court. But forced arbitration interferes with these statutory rights.

Public Citizen’s report calls on the CFPB to use its existing authority to restore consumers’ legal rights in all financial sectors, including the three examined in today’s report, by issuing a rule that bans forced arbitration in these contracts.

The report is available at https://www.citizen.org/our-work/access-justice/articles/righting-financial-wrong.