Consumer Financial Protection Bureau Director Richard Cordray spoke out on arbitration clauses and the bureau’s arbitration proposal currently under consideration at a meeting of the Consumer Advisory Board on Oct. 22, 2015. Not a fan of mandatory arbitration clauses, Cordray told the board that the clauses “rig the game’ against costumers to avoid class action lawsuits.
“These clauses are often buried deeply in the fine print of many contracts for consumer financial products and services, such as credit cards and bank accounts,” Cordray said. “Companies use them, in particular, to block class action lawsuits, providing themselves with a free pass from being held accountable by their customers in the courts.” The director added that “by inserting the free pass into their consumer financial contracts, companies can sidestep the legal system, avoid big refunds, and continue to pursue profitable practices that may violate the law and harm consumers on a large scale.”
CFPB proposal. Cordray said that the bureau’s proposal would prohibit companies from blocking group lawsuits through the use of arbitration clauses in their contracts. This generally would apply to the consumer financial products and services that the bureau oversees, including credit cards, checking and deposit accounts, certain auto loans, small-dollar or payday loans, private student loans, and some other products and services.
The proposal would not impose a complete ban on all pre-dispute arbitration agreements for consumer financial products and services, Cordray explained. Companies could still have an arbitration clause, but they would have to say explicitly that it does not apply to cases brought on behalf of a class unless and until the class certification is denied by the court or the class claims are dismissed in court. The bureau is not proposing “at this time” to limit the use of arbitration clauses as they apply to individual cases, he said.
Cordray did say that although the CFPB is not proposing to prohibit the use of pre-dispute arbitration clauses, the bureau will continue to monitor the effects of such clauses on the resolution of individual disputes.
Specifically, the proposal under consideration would:
“These clauses are often buried deeply in the fine print of many contracts for consumer financial products and services, such as credit cards and bank accounts,” Cordray said. “Companies use them, in particular, to block class action lawsuits, providing themselves with a free pass from being held accountable by their customers in the courts.” The director added that “by inserting the free pass into their consumer financial contracts, companies can sidestep the legal system, avoid big refunds, and continue to pursue profitable practices that may violate the law and harm consumers on a large scale.”
CFPB proposal. Cordray said that the bureau’s proposal would prohibit companies from blocking group lawsuits through the use of arbitration clauses in their contracts. This generally would apply to the consumer financial products and services that the bureau oversees, including credit cards, checking and deposit accounts, certain auto loans, small-dollar or payday loans, private student loans, and some other products and services.
The proposal would not impose a complete ban on all pre-dispute arbitration agreements for consumer financial products and services, Cordray explained. Companies could still have an arbitration clause, but they would have to say explicitly that it does not apply to cases brought on behalf of a class unless and until the class certification is denied by the court or the class claims are dismissed in court. The bureau is not proposing “at this time” to limit the use of arbitration clauses as they apply to individual cases, he said.
Cordray did say that although the CFPB is not proposing to prohibit the use of pre-dispute arbitration clauses, the bureau will continue to monitor the effects of such clauses on the resolution of individual disputes.
Specifically, the proposal under consideration would:
(1) provide consumers with their day in court, which Cordray called “a core American principle” given that the U.S. Constitution states that all Americans are entitled to seek justice through due process of law;
(2) deter wrongdoing on a broader scale. Although many consumer financial violations impose only small costs on each individual consumer, taken as a whole these unlawful practices can yield millions or even billions of dollars in revenue for financial providers who use arbitration clauses to protect “ill-gotten gains”; and
(3) bring the arbitration of individual disputes “into the sunlight of public scrutiny” by requiring companies to provide the CFPB with arbitration filings and written awards, which might be made public.
Finally, Cordray reiterated that the “central idea” of the proposals under consideration is “to restore to consumers the rights that most do not even know had been taken away from them.”
