By Katalina M. Bianco, J.D.
More than 50 Senate and House legislators have joined together to ask the Consumer Financial Protection Bureau to quickly complete its study of pre-dispute arbitration clauses in consumer financial products and services contracts and begin rulemaking to eliminate the clauses. The issue of forced arbitration is somewhat contentious. Banking trade groups have asked the opposite of the bureau: to avoid rushing into rulemaking.
Arbitration study. The CFPB in March issued a report to Congress, on mandatory arbitration clauses. The study is required under Section 1028(b)
of the Dodd-Frank Act. The bureau found that the clauses limit consumers’ right to seek legal relief in disputes with financial services companies. The CFPB reported further that in the consumer finance markets covered in the study, very few consumers individually seek relief through arbitration or the federal courts, while millions of consumers are eligible for relief each year through class action settlements.
Letter to Cordray. In a letter to CFPB Director Richard Cordray, the lawmakers said that mandatory arbitration clauses “force individuals into private binding arbitration as a condition of buying a product or service, and are designed to stack the deck against consumers and ensure that the final outcome of forced arbitration is unreviewable by courts.” Congress has recognized the potential harm of these clauses to the rights of consumers, workers, and small business owners and has passed a series of laws to limit the abusive use of forced arbitration clauses in various financial markets, such as mortgages, and in transactions involving auto dealers and others, according to the letter.
“In total, the study conducted by CFPB at Congress’s request roundly confirms that individuals unknowingly sign away their rights through forced arbitration agreements, which do not reduce consumer costs for financial services,” the legislators wrote. “Moreover, forced arbitration shields corporations from liability for abusive, anti-consumer practices, encouraging even more unscrupulous business conduct at the expense of individuals and law abiding businesses.”
The letter concludes with the lawmakers urging the CFPB to action “Based on this substantial bedrock of evidence.”
Industry groups. In a joint letter to Cordray, several banking and financial services trade groups—the American Bankers Association, American Financial Services Association, Consumer Data Industry Association, Financial Services Roundtable, and U.S. Chamber of Commerce—argue in opposition to the legislators. The trade associations want the CFPB to solicit comments from the public on its study of mandatory arbitration clauses before deciding whether to issue rulemaking. According to the letter, members of the organizations have asked CFPB staff members informally to solicit comments on the study. The associations now are formally requesting that the bureau solicit public feedback.
The associations state that a comment period is necessary for the following five reasons:
1. The bureau’s study is 729 pages, making it impossible for anyone to provide anything other than generalized reactions to the study during the one to two-hour roundtable discussions held by the bureau to obtain feedback.
2. The CFPB’s “limited outreach regarding its study has been, by definition, highly selective.” The organizations say that there are many businesses and consumers who would be affected by a rule regulating arbitration whose views were not solicited by the bureau.
3. Soliciting comments at this time “would at least start the process of compensating for the extreme lack of transparency and refusal to solicit public participation that characterized the Bureau’s study process.” The CFPB issued one Request for Information in 2012 soliciting comments on what topics the study should cover, the groups said.
4. Issuing a request for comments now would make the CFPB aware of “the significant defects” in the study that would “fatally taint any proposed rule” by the bureau. The trade associations provide as an example that the report addresses a limited data set of arbitrations in the consumer financial services context to see how arbitration in general functions.
5. Soliciting comments before undertaking a major rulemaking is consistent with the CFPB’s approach in other contexts.
The trade groups suggest a 60-day comment period on the bureau’s study before any rulemaking begins.
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